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The Bank of England reveals strategy to green CBPS

Sonia Shah Sonia Shah

The Bank of England (BoE) has unveiled how it plans to adjust its Corporate Bond Purchase Scheme (CBPS) to support the economy’s transition to net-zero. Sonia Shah discusses these plans and what it could mean for financial services firms.

The central bank is aiming to support the UK’s commitment to net-zero gas emissions by 2050. It noted that lenders and financial market investors have a role to play by shaping companies’ incentives through financing to reduce emissions.

The CBPS is a tool that purchases investment grade sterling corporate bonds issued by companies judged to make a material contribution to UK economic activity. The BoE said on 5 November that it will seek to make the composition of CBPS investments greener to support transition to net zero, without undermining the scheme’s primary monetary policy purpose.

The Bank said: “Firms will now need to satisfy climate-related eligibility criteria for their bonds to be purchased by the CBPS, with purchases then being “tilted” towards those eligible firms which are the stronger climate performers within their sectors.”

It will seek to reduce carbon intensity by 25% in the CBPS portfolio by 2025. Weakest performers will see action taken by the bank – including reduced purchases, removal of eligibility or even divestment.

Tools to push for net-zero

The BoE said it will deliver the strategy to green CBPS by applying high-level principles that will be actioned by four tools: targets, eligibility, tilting and escalation.

Targets

The Bank has chosen to align the CBPS with two key targets. Firstly, achieve net zero emissions associated with the CBPS portfolio by 2050. As well as an intermediate target guiding near term investment decisions – a 25% reduction in the weighted average carbon intensity of the CBPS portfolio by 2025.

The BoE said that it is targeting a medium-term timeframe to allow incentives to take effect and avoid ineffectiveness of overly long-term goals. This will help promote sustained changes in companies’ behaviour, the development of accountability and transparency, and consistency with guidance from existing net zero investment frameworks.

The bank noted that in the future it will also look to purchase eligible green corporate bonds but has chosen not to have an associated target.

Eligibility

The BoE will also make firms ineligible for further purchases unless they meet climate governance requirements. This includes companies:

  • without a climate disclosure compatible with UK mandatory requirements, which will be introduced for financial years beginning after April 2022
  • in the high emitting energy and utilities sectors which have not published an emissions reduction target, with effect from the November 2021 reinvestment round
  • not satisfying a set of stringent restrictions on the use of thermal coal, also with effect from the November 2021 reinvestment round.

It will follow scientific recommendations on activities that may hinder the net-zero goal and will change its approach to meet relevant targets.

The Bank also highlighted that issuers using thermal coal in their activities are also ineligible unless they meet stringent criteria.

Tilting

The bank will tilt purchases towards stronger climate performers and away from weaker performers, using a scorecard. This rating system will look at the level of emissions intensity, past reductions in absolute emission, climate-linked disclosures and verification of an emissions reduction target.

rating-system-tilting-boe.svg

Escalation

Additionally, to ensure firms are improving over time, the BoE will review the calibration of CBPS greening annually, adjusting requirements as the reliability of ESG data and metrics improve. This will be coupled with intensifying actions such as loss of eligibility and divestment where climate performance is considered inadequate.

The bank noted it will seek to be as transparent as possible, this would include publishing details of its greening tools, sharing a list of issuers held in its portfolio, give information on the share of eligible firms allocated to climate performance buckets, and detailed climate-related financial disclosures – as recommended by the Task Force on Climate-related Financial Disclosures (TCFD).

How to prepare

The BoE has set an interim target for the CBPS portfolio of reducing the weighted average carbon intensity (WACI) of the portfolio by 25% between its 2020 and 2025 disclosures.

This mean that firms seeing to leverage the scheme should act now. The nature of these firms mean that they are likely already in the public eye and must consider financial risks as well as reputational risks. While meeting the criteria is not easy, the BoE’s strategy only further supports the movement towards other metrics of corporate growth.

To find out how we can help your firm meet sustainability-linked targets and support on providing robust disclosure requirements, contact Sonia Shah.