Environmental Audit Committee recommendations for the Bank of England on post-COVID recovery
I am writing to you concerning the Committee’s current inquiry into the post-COVID recovery to make two recommendations to the Bank. Firstly, I would like to congratulate the Bank on its laudable work highlighting the financial risks from climate change in recent years. The Bank of England has led the world in this regard, not least by becoming the first central bank in the world to publish its own climate-related financial disclosure. The Bank is to be commended for its leadership on this.
The cross-party Environmental Audit Committee is now calling on the Bank to show continued leadership in this area by ensuring that its future actions to promote economic recovery reduce the UK’s exposure to climate risk. The Bank’s rapid response to the pandemic has been admirable and has no doubt saved many firms from folding as a result of cash flow problems. However, the Bank is at risk of creating a moral hazard by purchasing high-carbon bonds and providing finance to companies in high-carbon sectors without placing any conditions on them to make a transition to net zero.
We believe the Bank’s remit is already explicit in giving it recourse to consider the financial stability risks of climate change. The Bank must begin a process of aligning its corporate bond purchasing programme with Paris Agreement goals as a matter of urgency. It must do this before COP26 to avoid undermining UK diplomatic leadership on climate change and to demonstrate the seriousness of the UK’s commitment to fulfil its Nationally Determined Contribution.
In future, the Bank should require large companies receiving millions of pounds of taxpayer support via the Covid Corporate Financing Facility (CCFF) to publish climate-related financial disclosures in line with the Government’s Green Finance Strategy. The Bank should also write to all the companies that have already received CCFF loans to remind them that the Government’s Green Finance Strategy expects to see all listed companies and large asset owners publish disclosures by 2022.
We thank the Bank for its engagement with our inquiry and the insightful evidence provided by Sarah Breeden. We look forward to receiving the Bank’s response to these recommendations. I am copying this letter to the Chancellor of the Exchequer, Rt Hon Rishi Sunak MP.
22 January 2021
Thank you for your letter of 22 January 2021 and the Committee’s recognition of the Bank of England’s leadership on addressing the financial risks from climate change.
Climate change is a strategic priority for the Bank because, as your Committee has clearly set out, left unchecked it has the potential to cause significant damage to the UK economy and the financial system. To play our part in meeting this challenge we have put in place an ambitious domestic and international work programme, which includes: assessing banks and insurers against our supervisory expectations; launching a comprehensive climate scenario exercise (climate stress test); progressing an industry working group on investment in productive finance; and playing a leading role in key international fora such as the Network for Greening the Financial System (NGFS) and the Sustainable Insurance Forum (SIF).
As your letter notes, last year the Bank also became the first central bank to publish a climate disclosure report that covered all of its operations and key policy portfolios, including those held for monetary policy purposes. The vast majority of our monetary policy assets consist of UK government debt, which score relatively well on climate metrics compared to others in the G7. Around 2% of our monetary policy assets have been acquired via the Corporate Bond Purchase Scheme (CBPS). Consistent with the Monetary Policy Committee’s (MPC) current remit, the composition of the CBPS portfolio, and therefore its carbon footprint, is broadly representative of the underlying sterling corporate bond market. Consequently, the gap your letter highlights between the carbon footprint of the CBPS and Paris Agreement goals is a reflection of the current carbon intensity of the UK corporate sector as a whole.
I have for some time been eager to adjust our approach to the CBPS to be more supportive of climate transition as you propose in your letter. In order for such changes to be made, I believe it is important that the MPC’s remit should first clarify that the Committee should have regard for the Government’s climate objectives in the conduct of UK monetary policy. As I told the Treasury Select Committee (TSC) on 23 November 2020, discussions with HM Treasury on this matter are taking place. And work has already begun in advance of any potential change in remit to explore how we can go about adjusting the CBPS.
Given that the CBPS accounts for around 5% of the sterling corporate bond market, and the MPC currently has no active corporate bond purchases under way, much of the impact of any change in our approach would come through our influencing the approach of investors generally, rather than the sheer financial impact of our purchases. That makes it particularly important that we design our interventions in ways that create genuine incentives for companies to take meaningful actions to support the whole economy transition to net-zero emissions.
Your letter also proposes linking lending via the Covid Corporate Financing Facility (CCFF) to climate disclosures. I am not persuaded that this would be a particularly effective tool for increasing climate disclosure, since the CCFF is a short-term liquidity facility that closed to new applications at the end of last year and will shortly cease making any new loans altogether. A far more effective way to ensure climate disclosures are widely adopted is to make them mandatory, and that is why we have worked with other authorities through the UK Joint Government-Regulator taskforce on climate disclosures to publish a roadmap for mandatory disclosure requirements.
This year will give us a unique opportunity to demonstrate the progress we have made and our ambition for the future with the UK’s presidency of the G7 and hosting the UN COP26 conference. I look forward to continuing to work with the Committee on this challenge, and to reading your forthcoming report.
8 February 2021
353 In July 2020, Deputy Governor Sam Woods sent a to the CEOs of UK banks and insurers setting out that our on climate change must be fully embedded by the end of 2021.
354 The Bank will launch its first climate change Biennial Exploratory Scenario (BES) exercise in June 2020.
355 HM Treasury, the Bank, and the FCA have an industry working group on Productive Finance.
356 The Bank a climate disclosure report in line with the TCFD framework on 18 June 2020.
357 In November 2020, the UK Government-Regulator Task Force on disclosure a report and roadmap.