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.
Previous ArticleAPRA and RBA Release Statement on Actions to Address Climate Risk
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.