June 25, 2021
After years of justifying its support for some of the world’s most environmentally destructive companies under the principles of ‘market neutrality’, it’s great that the Bank of England is now taking action to ‘green’ its corporate bond purchase scheme (CBPS). But currently, our central bank’s approach is unlikely to be enough to fulfil its responsibility to align finance with the government’s environmental targets.
What is the Bank of England consulting on and why?
After pressure from a strong coalition of campaigners and experts including Positive Money, the Bank of England finally agreed to align its balance sheet with net zero, and now from March this year the Bank of England has been given the responsibility to ensure it’s supporting the government’s environmental goals in all of its policy areas. As a result of this, the Bank of England published a discussion paper in May that outlined its thinking on how it would ‘green’ its corporate bond purchase scheme (CBPS), often referred to as corporate quantitative easing (QE). Alongside this it launched a consultation for members of the public to have their say on these plans, which is open until 2 July.
The CBPS involves the Bank of England creating new money (£20bn so far) to buy up the debt (bonds) of the biggest corporations listed in the UK, in order to help ease credit conditions. In other words, the central bank uses its power to create money to make it even cheaper for these companies to borrow. As a result of the Bank of England’s commitment to ‘market neutrality’ some of the world’s most socially and environmentally destructive corporations have been benefiting from this public money. Studies from the LSE Grantham Institute and the New Economics Foundation have shown that the CBPS is disproportionately skewed towards high-carbon sectors, and the Bank of England’s own analysis suggest that it is aligned with 3C global heating – double the 1.5C upper-safe limit the UK is committed to targeting through the Paris Agreement.
What is wrong with the Bank of England’s approach?
The Bank of England’s approach outlined in their discussion paper is focused on ‘incentivising’ companies to shift to net zero. The logic is that while it may be attractive to simply ‘divest’ from fossil fuel companies and sell their bonds, doing so would mean the Bank no longer has a way to incentivise them to make the transition.
But this approach is based on some fundamental flaws. Firstly it is based on an assumption that all of these companies will be able to meaningfully align with net zero, or that they even have an interest in doing so. In this, the Bank appears to have been sucked into the greenwashing spin propagated by the likes of Shell and BP – companies whose revenues will realistically rely upon the continued extraction and burning of fossil fuels for as long as possible.
Despite the success of their PR campaigns, oil and gas companies still continue to invest far more in fossil fuels than green alternatives. This is because, by their very nature, finite and geographically limited sources of carbon are easier to extract profits from than abundant renewable sources of energy – the rates of return for fossil fuels are still three to four times higher. As the concept of a ‘carbon bubble’ explains, the huge valuations of these companies and their continued profitability is based on the existence of huge oil reserves, which in order to be monetised, will rely on human beings burning much more carbon then remains in ‘carbon budgets’ if we are to meet the targets of the Paris Agreement. The fact is that if we are to have any chance of limiting temperature rises oil companies will need to shrink. And their executives and investors have no reason not to resist this.
It is positive that the Bank of England is taking seriously the idea of excluding bonds from companies whose activities are fundamentally incompatible with net zero, as we have been urging them to do. The Bank has implied that it will exclude any company which isn’t aligned with the phasing out of coal, but it has left the door wide open to other fossil fuels such as oil and gas, citing their lack of knowledge as to whether the UK will have to phase out other dirty energy sources to reach net zero. Hopefully environmental experts will clear this up for them.
Secondly, the Bank of England seems to be hugely optimistic about the influence they can have on these huge multinational companies’ decisions to go green through this scheme alone. Whether or not the Bank of England will buy a relatively small amount of their bonds on secondary markets is likely to have very little bearing on the decisions of whether these companies transform their business models. For many of the companies eligible for the CBPS, these corporate bonds represent only a small source of their financing, and they will simply continue to raise funds from other financial markets (whether debt or equity) or from the banking system. It is true that being eligible for the CBPS improves their financing conditions and the cheapness at which they can borrow, but it is unlikely to outweigh all of the other factors which determine whether they go green – namely profitability and short-term returns to shareholders.
What should the Bank of England be doing?
The most powerful impact greening the corporate bond purchase scheme could have is through a signalling effect it will have for other investors. As the most powerful public institution at the heart of our financial system, the actions of our central bank reverberate across markets – if the Bank of England announces that it will be ‘blacklisting’ assets from its own balance sheet which are not climate safe, other investors will take note and adjust their own portfolios accordingly, driving finance away from fossil fuels.
If the Bank of England merely ‘tilts’ its portfolio away from high-carbon companies, as they are currently proposing, it will not nearly be as impactful as immediately excluding companies like Shell and BP, whose business models and material interests are fundamentally incompatible with a swift and orderly green transition.
Regardless, greening the CBPS alone will not be enough to realise the Bank of England’s mission of realigning the financial system it oversees with the government’s environmental targets – it should be just a first step. There are other even more impactful things our central bank could be doing, like introducing regulation penalising risky fossil fuel lending. And we also need to be making sure that funds which are steered away from fossil fuels are reinvested into genuinely green alternatives. You can read more about these proposals in a roadmap we recently produced with the New Economics Foundation.
Have your say
You can contribute to the Bank of England’s consultation by filling in this survey by 2 July 2021.
Check out our guide to filling in the survey here. We would encourage everyone to make their voices heard, even if it’s just writing a sentence or two in response to question 6, about the overall approach. The oil companies and big banks will no doubt be making sure their voices are heard, so together we need to drown them out.
For everyone who’d like to make a response step by step with us, David and Rachel from the Positive Money team are hosting a friendly drop-in zoom call on Wednesday 30th June. We’ll be going through how to respond together, and learning more about the Bank’s Corporate Bond Purchase Scheme along the way. We’re running through it three times that evening, with short sessions starting 6pm, 6.20pm, and 6.40pm. This walkthrough session is open to everyone, and will be a great opportunity to learn a bit more about these Bank of England policies, looking at how they could be fairer and more sustainable. Sign up to join the Zoom walk-through here.