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
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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