UK think-tank Positive Money, which advocates for a number of central banking reforms, has called on the Bank of England to stop accepting assets from fossil fuel and other environmentally damaging companies as collateral against its lending operations, saying that it contravenes the bank’s mandate to support the government target of reaching net zero by 2050.
In addition to accepting highly liquid assets such as highly rated government or sovereign debt (category A collateral), central banks, including the Bank of England, accept bonds from non-financial companies as eligible collateral.
However, in its latest research paper, Positive Money noted the BoE’s published list of eligible B and C collateral now includes debt from Shell and TotalEnergies, which it said are expanding oil and gas production. “The bank also accepts bonds from a number of other environmentally damaging companies,” according to the report. “This includes a subsidiary of coal producer BHP Group, as well as mining giant Rio Tinto.”
Accepting these companies’ bonds as eligible collateral, acts as an “implicit subsidy”, according to Positive Money, because their assets are boosted in value and disproportionately benefit from better financing conditions than more sustainable sectors.
Greater demand for these assets raises their price and lowers yields, said Positive Money, which has a significant effect on borrowing and lending activities across the broader economy, and for the green transition.
“Not only does this mean public money is being used to prop up an industry detrimental to our future on this planet, but it fails to account for the fact that fossil fuel holdings are likely to become stranded assets, which would leave the public to foot the bill when they become worthless and banks crash the economy again,” said Positive Money’s senior policy and advocacy officer and lead author of the report, Ellie McLaughlin.
In 2021, Prime Minister Rishi Sunak, who was then UK chancellor, changed the BoE’s mandate to require it to support the government’s goal of reducing greenhouse gas emissions to net zero.
The central bank committed to taking steps to cut carbon emissions in its physical operations (buildings, printing of banknotes) and announced that it would refocus its £20bn corporate bond portfolio on greener companies by putting in place “climate-related” criteria for them to be included in its asset purchase programme. The bank’s asset purchasing programme is separate from its collateral framework.
The Financial Times reported that the BoE was “willing in principle” to invest in fossil fuel companies, because it believed engagement worked better than divestment, although companies engaged in thermal coal would be excluded.
However, last year, Sunak made a series of U-turns on key green targets such as phasing out petrol and diesel cars.
In recent evidence, BoE governor Andrew Bailey gave to the Economic Affairs Committee, he said the central bank had reduced its resources for climate-related matters in response to the shift in focus by the government, but would still look at the impact of climate risk on financial stability.
Positive Money says the BoE’s progress on operationalising its green remit has stalled, and called for increased transparency of the bank’s collateral operations, including disclosing the environmental footprint of holdings and excluding assets from issuers whose main economic activity is incompatible with climate and environmental goals. The BoE declined to comment.
In 2022, as part of its climate agenda, the European Central Bank announced that it would account for climate change in its corporate bond purchases, collateral framework, disclosure requirements and risk management, in line with its climate action plan. The measures will limit the share of assets issued by entities with “a high carbon footprint” that can be pledged as collateral by individual counterparties when borrowing from the central bank.
An ECB spokesperson told The Banker that efforts regarding collateral should be implemented by end of this year, provided technical requirements are in place. “Once the implementation is feasible from a technical standpoint, more details will be provided,” the spokesperson added.
