Coronavirus QE must also be green: Andrew Bailey needs to stick to his word

Amid the coronavirus crisis, we risk backsliding on the progress we’ve made towards decarbonising our financial system. We must make sure the new Bank of England governor keeps his promise to support the green transition.

In recent weeks Positive Money has won a series of big victories in the battle to stop our financial system fuelling climate collapse. First up, we worked with other research and campaign groups including Greenpeace and the New Economics Foundation, to coordinate an open letter which helped push climate on the agenda for the new governor of the Bank of England, Andrew Bailey. Our letter caught the eye of Julie Marson MP and it was her question in reference to it that led Bailey to commit to shifting the central bank’s asset purchases to support the green transition.

Secondly, we reaped the rewards of our past lobbying of the Treasury Select Committee, when it published a letter from outgoing governor Mark Carney revealing that the Bank of England is considering our calls for a ‘brown-penalising’ factor which would make it costlier for banks to lend towards polluting activities. This was a response to the Treasury Select Committee’s inquiry into decarbonisation and green finance, in which Carney was asked about measures to penalise high-carbon lending recommended by Positive Money in the evidence we’d submitted.

Our third victory came when the Treasury finally removed all doubt about whether climate is a matter for the Bank of England. In July of last year the government had pledged to update the central bank’s mandate and tie it explicitly to the Paris Agreement, but then failed to deliver on this when the Chancellor wrote to the Bank in November. With the government looking like it was backsliding on a crucial climate commitment, we partnered with Green MP Caroline Lucas to make sure the Treasury would deliver on its promise ahead of the next budget in March. Together we composed a written question to the Treasury on the matter, and they responded to say that they would include climate in the next letter the chancellor sends to the Bank of England. On 11th March the government finally delivered on this, givinging the green light for the Bank of England to take further action to stop the firms it regulates from fuelling environmental breakdown.

But amid the coronavirus-induced chaos, there is now a risk of  backsliding on all this progress to decarbonise our financial system. As the Financial Times reported, banks are already using the unfolding crisis to push back on regulations, including new climate stress tests the Bank of England has scheduled for next year. Sadly, this seems to have worked, with the central bank deciding to delay the introduction of new regulations, and reviewing whether it will go ahead with climate stress testing.

On Thursday the Bank of England also announced an extra £200 billion of quantitative easing (QE) as part of its response to the economic fallout of Covid-19, putting the total figure for the central bank’s money creation programme up to £645bn. This round of QE will see the Bank buy up both government – and more controversially – corporate bonds, but it is not yet clear what the exact composition of assets will be.

Positive Money has been a vocal critic of such corporate QE since it was first rolled out in 2016. Through it, newly created public money has been used to buy bonds from some of the most environmentally and socially destructive global corporations, including the likes of Shell, BP and Total.

Now more than ever, in the midst of a public health emergency, a much better use of newly created money would be sending it to households directly, in a form of QE for People. This would allow people to make ends meet without needing to put themselves and others at risk by going to work, and would be more effective than measures to bail out companies in the vain hope they won’t lay off workers.

But since more corporate QE has already been announced, the least we can do now is call on Andrew Bailey to stick to his promise to decarbonise it. This means not buying any bonds from fossil fuel companies.

We don’t know what the BoE will be buying yet – the Bank says it will publish details of its corporate QE purchases in “coming weeks”. Bailey’s letter to the chancellor also says:

“There will also be the opportunity for HMT to provide views to the MPC on the design of private sector asset purchases, in light of their broader economic objectives and in view of the risks posed to the public sector balance sheet. Any changes to the maximum size and composition of assets held in the APF will continue to be agreed through an exchange of letters between you and Changes to the parameters within the risk control framework will also continue to be agreed between Bank and Treasury officials.”

In his response to our aforementioned open letter, Andrew Bailey said he would “take forward” decarbonising QE with the Treasury – which would ultimately have to sign-off such a change – as “a priority”. Hopefully he has already taken this up with the Treasury, which is being given the opportunity to comment on what assets the Bank of England can buy. Both Bailey and Chancellor Rishi Sunak must agree to exclude fossil fuel assets from this new round of QE, otherwise they will be undermining efforts to tackle the climate emergency.

Last week we outlined three important principles for the economic response to Covid-19, one of which must be to support the green transition. As founding director of the SOAS Centre for Sustainable Finance, Ulrich Volz put it in an excellent letter to the FT, “All countercyclical policy measures should be either carbon neutral or carbon negative.”

Simply put, the coronavirus crisis cannot be used as an excuse to bailout industries that pose an even greater threat to our health and the health of our planet in the longer-term (and indeed already kill millions of people each year).

Thanks to our campaigning, the Bank of England governor has pledged to make decarbonising QE a priority. Meanwhile the Bank is looking into penalising fossil fuel lending for the firms it regulates and the government has made clear that climate is a matter for the central bank. If any of the additional £200bn created by the Bank of England does go towards high-carbon assets, our central bank will not only be taking a step backwards, but it could be contravening its very own mandate.