The Bank of England has published details of how it will green its Corporate Bond Purchase Scheme. This follows publication of a Discussion Paper in May, and subsequent engagement with a wide range of stakeholders including net zero investment experts, asset managers, climate groups and the wider public.
The approach, published alongside a Market Notice, implements the principles set out in that Discussion Paper. It is consistent with targeting a 25% reduction in the weighted average carbon intensity (WACI) of the CBPS portfolio by 2025, and full alignment with net zero by 2050. Firms will now also need to satisfy climate-related eligibility criteria for their bonds to be purchased by the CBPS, with purchases of eligible firms’ debt being “tilted” towards the stronger climate performers within their sectors. The extent to which purchases are tilted either towards or away from a given firm will depend upon the strength of its climate performance, assessed against four metrics: the emission intensity of its activities; its progress to date in reducing emissions; having published a climate disclosure; and having an emissions reduction target (with more credit if this is third party verified).
Escalation will increase our requirements of firms over time and ensure actions – including reduced purchases, removal of eligibility or even divestment – can be taken against weaker performers.
Bank of England Governor Andrew Bailey said, “Our strategy in greening the CBPS is to help incentivise firms to put in place and adhere to credible plans for reducing their emissions. Incentivising change is more powerful than immediate divestment to encourage the significant shifts in behaviour required across the economy in order to achieve net zero by 2050. We hope that being transparent about our approach will encourage and enable other investors to further develop strategies to green their portfolios.”
The CBPS is a monetary policy tool, and so its size is determined by the Monetary Policy Committee (MPC) as part of its monetary policy decision making in order to achieve its inflation target. For as long as the MPC maintains its target for CBPS holdings, the Bank will undertake periodic reinvestment operations to replenish the Scheme as bonds mature. One such operation took place in late 2019; the next one beginning later this month will be the first to incorporate the new greening methodology.