Thread by @lukasz_krebel

Big #ClimateFinance news - and not from #COP26!
@bankofengland, following the consultation earlier this year, has announced how it intends to green its corporate QE.

A thread (1/19):

First, what is corporate QE? Officially named CBPS (Corporate Bond Purchase Scheme), it's one of Bank's monetary policy tools used in implementing its mandate. That mandate, since March this year, also includes support for transition to net-zero economy. (2/19)

CBPS is relatively small (~£20bn, compared to overall QE of nearly £900bn, consisting primarily of purchases of government gilts). Yet it has an important signalling effect for the market - if BOE purchases firm's bonds, it tends to lower their borrowing costs overall (3/19)

The problem with the CBPS is that, by following the concept of 'market neutrality', the Bank ended up reinforcing the carbon bias of the economy & indirectly subsidising polluting companies (4/19)

neweconomics.org/2020/08/decarb…

The Bank has finally recognised this in its recent climate disclosures, estimating that CBPS was aligned with estimated 3C warming by 2100 (double the 1.5C goal of #ParisAgreement !)

And today it has published its approach on remedying that fact (5/19)

bankofengland.co.uk/markets/greeni…

So how does the new approach shape up?

- The Bank announced it will begin excluding activities ‘that scientific evidence suggests are incompatible with reaching net zero by 2050’ starting with thermal coal ✅
(6/19)

But: it has failed to extend this to all new #FossilFuels which are also clearly incompatible with climate targets, not the least according to the global authority on energy @IEA ❌
(7/19)

iea.org/reports/net-ze…

The Bank will adopt a scorecard approach, taking into account a number of variables across both past performance and forward-looking commitments - that should make it harder for dirty firms to ‘game’ the system if a single metric was used ✅
(8/19)

The Bank will include in its assessment of firms’ the past change in absolute emissions and penalise firms who do not self-report such data ✅
(9/19)

But - the Bank's overarching metric of 'success' will be the reduction in WACI (weighted average carbon intensity).

While it makes it easier to account for firm size, it is not a metric that captures what is important for climate change – absolute emissions.
(10/19)

It is even possible that firms’ WACI might decrease while its overall emissions increase.

And furthermore, we're in #ClimateEmergency yet the Bank's path to reduce even this measure is very slow: just by 25% by 2025 ❌
(11/19)

The Bank does, however, plan to 'require high-emitting sectors (energy, electricity, gas, and water) to have published a decarbonisation target in order to be eligible for purchase’ and will 'reward' those whose plans are verified as credible by 3rd party ✅
(12/19)

The Bank also committed to an escalation approach, to penalise firms that do not improve over time. ✅
But, its overall approach is 'carrots first, sticks later', with 'penalty points' for firms poor on climate some 3-5 years away ❌
(13/19)

Yet-the Bank leaves a window open to penalise (divest and exclude from eligibility) after 1 year in worst cases. That should be the starting point! With CBPS so small vs overall economy, BOE could send powerful market signals yet not worry about any immediate instability
(14/19)

Then tilting - shifting purchases (within sectors) from firms bad on climate to the better ones. Sensible in theory (IF the Bank excluded the worst polluters upfront) but BOE should be wary of 'carbon intensities' & give more weight to reducing total emissions
(15/19)

So coming to a conclusion: it is a well though-out framework, and makes some important steps (such as adding outright exclusions for coal), as well as paying attention to actual climate performance (emissions) over financial risks from climate change. But..
(16/19)

One major thing that appears to be missing is the sense of URGENCY. We're in a climate crisis, and @bankofengland, having outlined this comprehensive framework, needs to use it boldly to send powerful signal that the era of #fossilfinance is over
(17/19)

And for this, UK and other governments set the lead already, committing to end all public finance for #fossilfuels by 2022. Now the Bank - working with @hmtreasury & @beisgovuk - must ensure this logic is applied to private finance too.
(18/19)

As @PositiveMoneyUK argue here, the Bank needs to act now to ensure fossil fuel majors that continue to invest in harmful activities are excluded

(19/ -> 20)

https://twitter.com/PositiveMoneyUK/status/1456611709192445958?s=20

We now have the government's Net Zero Strategy. We have more detailed targets under the #ParisAgreement. We have commitments to decarbonise public finance. Now it's time to reshape private finance, to be fit for #netzero & fit for the future
(20/END)
neweconomics.org/2021/06/greeni…

Would be interested to hear your thoughts and if you see the CBPS plan differently in terms of glass half full/emptiness! @Pierre_Monnin @DanielaGabor @jryancollins @NVJRobins1