Bank of England given new mandate to buy ‘green’ bonds

The Bank of England will change its approach to buying corporate bonds after the government said environmental and climate goals should now be explicitly considered part of monetary policy.

In Wednesday’s Budget, Rishi Sunak, the chancellor, said the BoE should support the government’s efforts to make the UK economy greener and achieve zero greenhouse gas emissions by 2050, and updated its mandate.

However, environmental groups were disappointed with the lack of big announcements in the rest of the Budget — which comes ahead of November’s UK-hosted COP26 climate summit — saying Sunak delivered “green nuggets” rather than a “green recovery”. An increase in fuel duty was cancelled and funding was not restored to a flagship scheme to upgrade home insulation.

In a widely anticipated move, Sunak reaffirmed the BoE’s longstanding 2 per cent inflation target but said monetary policy should now “also reflect the importance of environmental sustainability and the transition to net zero.”

In response, the BoE said it would adjust its approach to corporate bond buying “to account for the climate impact of the issuers of the bonds we hold”.

Karen Ward, chief market strategist at JPMorgan Asset Management, said investors “should not underestimate” the impact that the reform could have on sustainable investing.

“This could tilt the preference of the central bank’s asset purchases and involve considerable regulatory change to encourage private capital to do likewise,” she said.

Philip Dunne, chair of the House of Commons’ Environmental Audit Committee, said he was “delighted” by the change. Before COP26, the BoE should outline “the steps it will take to reduce the carbon footprint of its corporate bond portfolio to align with the temperature goals of the Paris Agreement,” something the committee called for in January.

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He said changes should focus initially on new purchases, but over time the entire portfolio should be reoriented to take account of the climate impact of bond issuers.

The BoE said on Wednesday it planned to have changed its approach to corporate bond buying before its next scheduled round of investments, in the fourth quarter of the year.

In a separate letter to BoE governor Andrew Bailey on Wednesday, Sunak said the UK’s decarbonisation efforts would mean “systemic changes across all parts of our economy”. The financial system should support the transition to a net zero economy, and be “resilient to the physical and transition risks that climate change presents,” he said.

The BoE is due to carry out its first climate “stress test” this year, while the government plans to introduce new climate-related corporate disclosure requirements.

Responding to the Budget Sam Alvis, from the Green Alliance think-tank, said it was clear that the Treasury was “moving in a green direction but it’s doing it very slowly”. 

Rebecca Newsom, head of politics at Greenpeace UK, said: “For all the talk of a green recovery, this Budget suggests the chancellor has failed to clock the urgency of the climate emergency.”

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