BoE becomes first central bank to green its corporate bond buying
The Bank of England has beaten the European Central Bank to the punch, becoming the first central bank to adopt a green lens for its corporate bond buying programme.
Although peers such as Banque de France and De Nederlandsche Bank already operate responsible investment policies that emphasise green bonds and ESG considerations, the UK institution is setting a lead for central banks that buy corporate bonds as an instrument of monetary policy.
The shift will begin as soon as this month. The BoE said the main purpose of its bond buying via the corporate bond purchase scheme was as a monetary policy tool but that supporting the transition to a net-zero emissions economy would now be a secondary objective.
The bank is due to start topping up the scheme back to the £20bn limit set by its Monetary Policy Committee after some holdings matured, having last replenished the scheme in late 2019.
At its ceiling, the CBPS represents a little over 6% of outstanding eligible sterling corporate bonds. In an announcement explaining how it will green its corporate bond purchases the BoE describes itself as “a relatively small, though influential, investor in marketable sterling corporate debt”.
The BoE has some £552m to buy, plus replacements for any bonds that mature during the replenishment period. That runs from November 24 into 2022, with a break between December 16 and January 5.
Conducted via reverse auctions of up to £20m nominal per bond on Wednesdays and Thursdays, the purchases will differ from past CBPS by being subject to climate-based eligibility and a green “tilt” within sectors to incentivise stronger performers. Companies will be assessed under a scorecard that weighs their emissions intensity and progress in reducing that, as well as their published climate data disclosures and targets.
Thermal coal miners will be ineligible and those that generate revenues from the commodity must meet additional criteria. High emitters like utilities must have published a reduction target.
While its volume of purchases will not be enormous, the central bank hopes to set an example for other buyers. “We are trying to set out a clear framework and approach for climate-conscious, pro-transition to net-zero investing, hoping to do thought leadership and influence other investors,” said a Bank of England spokesperson. “We hope that others will follow suit.”
Some £7bn of sterling corporate green, social, sustainability and sustainability-linked bonds are eligible for purchase. But while the central bank regards ESG debt as a “useful asset class in terms of transition”, it will not prioritise it.
The BoE’s green tilt “is designed to differentiate between the overall climate behaviour and plans of companies – it’s a broader take”, the spokesperson said.
No rush in Frankfurt
In contrast to the BoE, the ECB will only begin greening its €300bn corporate sector purchase programme late next year. “Eurosystem committees are working on developing the adjusted framework guiding our corporate bond purchases in a manner to incorporate climate change criteria in line with our mandate. Further details on this adjustment, such as when changes and adaptation would enter into force, will be announced in 2022,” an ECB spokesperson said.
The ECB’s “pledge on climate change action”, published during the COP26 climate summit, targets Q4 2022 for adjusting the rules for corporate asset purchases to factor in climate criteria. The ECB aims to start disclosing climate information on its CSPP holdings in Q1 2023.
The ECB is aware of the BoE’s initiative, the spokesperson said, adding: “We follow our own timeline.”
Paris pushes ahead
Among other central banks, the Banque de France stands out for its responsible investing. Since 2018 it has been incorporating climate considerations and broader ESG issues into its management of its own funds and the BdF pension fund. Those portfolios total some €23bn.
Last year BdF stepped up its efforts “to align its portfolios with a sub 2°C global warming trajectory while helping to finance the energy and ecological transition”. It committed to exit coal completely by 2024 and “significantly limit” its investments in hydrocarbons, as well as beginning to factor biodiversity into its ESG analysis and placing greater emphasis on social issues.
BdF began buying social and sustainable bonds alongside green bonds in 2020.
De Nederlandsche Bank also emphasises responsible investing. It was the first central bank to sign the Principles for Responsible Investment in 2019.
DNB held some €320m in green bonds at the start of 2021. It plans to increase that to €400m by the end of the year.
Source: Reuters (Reporting by Julian Lewis)