Will the Bank of England Stop Buying Bonds from Businesses that Boost Global Warming?
On Monday some members of the British parliament stated that the Bank of England would be wise to consider adopting a policy to discontinue its bond buying program from businesses that contribute to global warming. Let’s take a closer look into this matter.
The official position
In an effort to support the economy during the pandemic, The Bank of England doubled its holding of corporate bonds to 20 billion pounds. Nevertheless, The Audit Committee of The House of Commons is not satisfied that a lot of those bonds came from firms that produce high carbon emissions. This goes against government and Paris Agreement green goals, so they consider it a matter of urgency. Finance Minister Rishi Sunak would be looking into potential changes in the national bank’s policies to focus more on environmental issues.
The UK will be the host for the global COP26 climate summit this year and implementing new and improved green policies would be an appropriate example for the country to set. The BoE has stated that climate change is a key matter that they plan to tackle with an ambitious work program. The full details of this program are still to be unveiled but they have already said in advance that it would test the entire UK banking system. Banks and insurers will be verified against all kinds of climate-related risks in order to make the UK’s network more environmentally sound. Moreover, the central bank is planning to review their existing corporate holdings once the pandemic situation has calmed down.
The UK’s main goal is to support a wide variety of businesses during this economic emergency while working to achieve their green goals. This can be a daunting task since the BoE holds corporate bonds in proportion the amount presented on the market. These circumstances create a conflict because the national bank owns 19% of bonds from electricity companies, 6% of those from gas companies and 11% from transport businesses, which demand a lot of energy. So the government is now looking for a mechanism that will allow financial institutions to pay greater attention to climate-change risks. They affirmed that a green ‘stress test’ will take place in June.
The UK’s administration is also open to receiving assistance from international financial institutions in order to establish these new green policies in the banking system. Thus, we should expect the government to acquire fewer bonds from businesses that speed up global warming, but it is going to take time and a lot of compromise.