BoE published a discussion paper that seeks feedback on the principles to guide how best to incentivize transition to net-zero carbon emissions via the Corporate Bond Purchase Scheme and the tools BoE might use to operationalize these principles. The paper describes the role of BoE as an investor in sterling corporate bonds (via the Corporate Bond Purchase Scheme), its monetary policy mandate, and the carbon footprint of its holdings. BoE is requesting feedback, on the questions raised in the discussion paper, by July 02, 2021. In this context, BoE also published a speech by Andrew Hauser, Executive Director for Markets, discussing the options for greening the Corporate Bond Purchase Scheme.
In judging how the Corporate Bond Purchase Scheme might best support an orderly economy-wide transition to net zero, BoE proposes to follow three broad principles:
- Incentivize companies to take decisive action to achieve net zero. BoE wants firms whose debt it might hold to change their behavior in meaningful and lasting ways that support orderly transition to net zero by 2050—not simply to minimize the current climate footprint of the portfolio. Exclusions or divestments will be part of the toolkit, but only where they incentivize that transition.
- Lead by example, learn from others. Given the relatively small scale of the Corporate Bond Purchase Scheme, BoE will work closely with others in designing its approach, drawing on the work of relevant market-wide initiatives, seeking to influence that thinking where appropriate, and illustrating how comparable investors might approach similar challenges.
- Ratchet up requirements over time. As data and metrics on transition pathways and firm-level emissions improve and issuers have the opportunity to develop credible net-zero strategies, approach of BoE will become progressively more demanding, with higher expectations and sharper incentives.
To operationalize these principles and draw on engagement with those leading the development of the most advanced investor frameworks, BoE proposes to explore four key tools:
- Portfolio targets. There are clear benefits to setting and disclosing interim targets for certain climate properties of the Corporate Bond Purchase Scheme portfolio. Available options (such as target paths for portfolio emissions, or forward-looking temperature rise measures) present different combinations of conceptual merits and challenges. Over time, BoE will also look to purchase eligible green corporate bonds as the new sterling green gilt program catalyzes issuance.
- Asset eligibility. Early priorities of BoE will include reinforcing the government timeline toward mandatory climate disclosures and examining the case for selectively excluding issuers involved in certain activities judged incompatible with the transition to net zero.
- Tilting purchases. BoE will rebalance—or "tilt"—its purchases of bonds toward eligible issuers with stronger relative performance in terms of the goal of achieving net zero, aiming to take account of past and credible prospective improvements.
- Escalation. BoE will design and implement a strategy for the Corporate Bond Purchase Scheme which features progressively more stringent requirements, and repercussions for issuers who do not meet them. Steeper tilts, removal of eligibility, or future sales of bonds could all be possible responses for issuers whose climate performance does not follow a credible net zero path.
Over the coming months, BoE intends to evaluate the benefits and risks associated with the proposed approach in more depth, with the intent to identify and remedy any gaps. BoE will then construct a calibrated package that is consistent with the principles it has set out, is robust to uncertainties over the nature and timing of transition, and uses reliable data and metrics.
Comment Due Date: July 02, 2021
Keywords: Europe, UK, Banking, Securities, Corporate Bond Purchase Scheme, ESG, Climate Change Risk, Corporate Bonds, Sustainable Finance, BoE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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