The Bank of England is set to take an important step forward in its response to climate change, after incoming governor Andrew Bailey told MPs he intends to exclude fossil fuel assets from its quantitative easing programme – a key demand from campaigners.
He was responding to a question about an open letter we coordinated with a group of leading NGOs this week, asking him to use all tools at the Bank’s disposal to realign finance with the Paris climate agreement. Our letter was signed by 101 economists, ex-central bankers and financiers and received widespread coverage.
It was picked up by Treasury Select Committee member Julie Marson MP in a hearing with the new governor.
Andrew Bailey told the committee that there is a “very strong argument” for shifting the make-up of the Bank of England’s asset purchases to support the public interest in moving towards net-zero carbon emissions. He said he intends to discuss the issue with the Treasury, which would ultimately need to sign off such a proposal, and clarified that “it will be a priority”.
Although the details are yet to be finalised, this move will send an important signal to banks and investors that holding high carbon assets is not consistent with the move to a net zero economy. It will remove the implicit subsidies delivered to the fossil fuel companies whose bonds are listed as eligible for purchase. And it’s also a sign that the Bank of England is breaking with its strict adherence to ‘market neutrality’, whereby its operations reflect current market activity, even when this is at odds with the Bank’s own warnings about financial stability, or the government’s stated policy objectives.
We hope this announcement will mark the beginning of a bigger shift in the Bank’s approach towards the climate crisis. As argued by Josh Ryan Collins, Hugues Chenet and Frank van Lerven, central banks up till now have been too reliant on market-based solutions to address climate risk. Their assumption has been that giving participants access to more information – for example via disclosure and stress-testing – will inevitably lead markets to correct their behaviour.
While necessary, this will not be sufficient. Climate risk is, by its nature, fundamentally uncertain. Both the effects of climate change itself – and the political response to it – are impossible to accurately predict. We therefore need to adopt a precautionary approach and work to mitigate the impacts of climate change even when we are unclear exactly how it will unfold. This means using regulation and monetary policy frameworks to actively steer markets in the right direction.
This is why our letter argues that central banks including the Bank of England “must use all the tools at its disposal to realign finance with internationally-agreed climate targets.” Global governments have committed to keep warming close to 1.5C, and the Bank needs to anticipate and amplify the policy interventions arising from those commitments.
There are also more immediate questions that arise from Andrew Bailey’s remarks. How will the Bank of England define which assets are affected by this shift in its approach? And will its commitment extend to other aspects of monetary policy? If the same principle were applied to the Bank’s collateral framework – the securities it accepts against its lending to private banks – the impact could be even greater.
Our letter also calls for the Bank to require lenders to hold more capital against high-carbon lending – the so-called ‘brown-penalising factor’. This would help to disincentivise lending towards carbon-intensive activities.
Along with other civil society groups we’ll be engaging with Andrew Bailey as he takes up his post later this month. We’ll also work with newly-appointed MPs on the Treasury Select Committee to provide effective scrutiny on this issue, including via its ongoing inquiry into decarbonisation and green finance.
For now, this is an important victory for the NGOs, academics, policymakers, campaigners and internal staffers who have worked for many years towards a more climate-friendly Bank of England. And, with the UK hosting the UN COP26 climate change conference, progress like this will reverberate around the world.