The Bank of England’s quantitative easing (QE) programme is made up of two types of asset purchases – UK government bonds and sterling corporate bonds issued by non-financial companies. The corporate bond purchase scheme (CBPS) was launched in August 2016, expanded in 2020 and the stock of bond purchases is currently maintained at £20 billion, as decided by the Monetary Policy Committee (MPC). The bonds purchased are issued by firms from across a wide spectrum of economic/company sectors that make a material contribution to economic activity in the UK, subject to some eligibility requirements. Many investors are now focussed on environmental, social and governance (ESG) issues and although the CBPS is a monetary policy tool rather than a typical investment portfolio, the MPC’s remit includes supporting the government’s economic policy, which in turn includes supporting the transition to a net zero economy.
Therefore the Bank has been working on “greening” the CBPS, to take the climate impact of the issuers of bonds into account, having published a discussion paper earlier in the year and engaged with a wide range of stakeholders including net zero investment experts, asset managers, climate groups and the wider public.
The Bank has set out three high level principles for its approach, these being:
The Bank has developed four tools to implement these principles:
This methodology is now being applied to its corporate bond purchases and the Bank has upped its information provision relating to the CBPS, including publishing a list of the bonds eligible and a list of the issuers held within the portfolio. One of the aims of this is to make it observable if the Bank divests the bonds of a particular issuer, which could be a powerful public statement.
On the matter of divestment, the Bank has made it clear that it agrees the net zero transition is not well served by climate-conscious investors indiscriminately stopping investment in firms which are currently high emitters. It believes this would instead hand influence over crucial parts of the economy to other investors who might care less about climate change, and it would also fail to make a distinction between those firms which have credible plans for emissions reduction and those which do not, therefore failing to incentivise putting such plans in place. This broadly aligns with the engagement approach taken by many large investors and asset managers in relation to environmental issues.
The Bank hopes that its approach and transparency will contribute to best practise and help other investors to learn and perhaps apply similar principles to their own activities. In an ESG landscape that lacks real industry standards, the work is a welcome addition to the best practice debate.
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