While campaigners have long criticized the BoE’s bond buying from ‘big polluters’, and the public debate about the appropriate carbon price to achieve the Paris Agreement goals is ongoing, the BoE is demanding that UK corporates do their green homework. It will set targets for the overall emissions of its corporate bond holdings, invest in ‘green’ corporate bonds as they become available, and it will request bond issuers to publish their emissions as well as price in climate risks and transition costs.
Consequently, issuers with a stronger climate performance will become the preferred targets for the CBPS, and as such will find it easier and cheaper to raise money, while businesses that the BoE regards as ‘inconsistent with achieving net zero’ and hence as not suitable for its portfolio, will most like pay a ‘penalty’ on the financial markets when raising debt and will see their reputation tarnished.
Without any doubt, the BoE move will further increase pressure on companies with high carbon emissions and in particular on those that haven’t yet set out a credible path to reduce emissions: the BoE has stressed that it will focus on the path of a company’s emissions as well as the absolute level.
Moreover, as outlined earlier, the buck doesn’t stop here. On the other side of the channel, the ECB will come under pressure to take similar action, which should come as a natural next step after the EU’s comprehensive package of measures, announced in April. The measures have been designed to further help increase the flow of money towards sustainable activities as well as re-orient investments towards more sustainable technologies and businesses.
So, don’t underestimate the ripple effect of – what some might consider – the CPBS pebble.