The Bank of England (BoE) has recently detailed its approach to greening the Corporate Bond Purchase Scheme. The BoE approach centers on three high-level principles: incentivizing firms to take decisive actions that support an orderly transition to net zero, leading by example while learning from others, and ratcheting up requirements over time as data and metrics improve. The approach is consistent with targeting a 25% reduction in the weighted average carbon intensity of the Corporate Bond Purchase Scheme portfolio by 2025 and full alignment with net zero by 2050.
Firms will now also need to satisfy climate-related eligibility criteria for their bonds to be purchased by the Corporate Bond Purchase Scheme, with purchases of eligible firms’ debt being “tilted” toward the stronger climate performers within their sectors. The extent to which purchases are tilted either toward or away from a given firm will depend on the strength of its climate performance, assessed against four metrics: the emission intensity of its activities, its progress to date in reducing emissions, having published a climate disclosure, and having an emissions reduction target (with more credit if this is third-party verified). Firms that meet these eligibility criteria, in addition to those already in place, will be eligible for purchase. Purchases will then be “tilted” or skewed within sectors toward the debt of eligible firms that are performing relatively strongly in support of net zero—and responding most to the incentives we are setting—and away from those who are not.
A scorecard allocating firms to different climate buckets will be used to assess their performance across multiple climate metrics and to drive investment decisions via the price the Corporate Bond Purchase Scheme is prepared to pay for an eligible issuer’s bonds. Escalation will increase the requirements of firms over time and ensure actions—including reduced purchases, removal of eligibility, or even divestment—can be taken against weaker performers. The BoE strategy in greening the Corporate Bond Purchase Scheme is intended to help incentivize firms to put in place and adhere to credible plans for reducing their emissions. Incentivizing change is more powerful than immediate divestment to encourage the significant shifts in behavior required across the economy to achieve net zero by 2050.
Keywords: Europe, UK, Corporate Bond Purchase Scheme, Climate Change Risk, Disclosures, CBPS, Corporate Bonds, Sustainable Finance, Low-Carbon Economy, Net Zero Transitions, ESG, BoE
Previous ArticleAPRA and RBA Release Statement on Actions to Address Climate Risk
The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.
The European Banking Authority (EBA) Single Rulebook Question and Answer (Q&A) tool updates for this month include answers to 10 questions.
The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.
The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).
The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.
The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.
The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).
The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.