The BoE to start applying climate criteria to its credit purchases

In breve

A very ambitious climate policy: The central bank is targeting a 25% reduction in the weighted average carbon intensity (WACI) of the CBPS portfolio by 2025, and full alignment with net-zero by 2050. The Bank of England is also aware that another important role of this policy is to influence markets in a mutual exchange approach with other key stakeholders.
Market Commentary

Highlights:

  • The Bank of England has published the details of the greening framework for its corporate bond portfolio, announced earlier this year, and will start applying it next month.
  • They are aiming for a 25% decrease in emissions from corporates included in the portfolio by 2025 and net-zero by 2050, both via new eligibility requirements and tilting criteria. 
  • Eligibility criteria and the tilting framework are smartly designed to skew investments towards energy transition champions and away from the laggards, looking at past and future carbon intensity trajectories, with also increased requirements on high carbon-intensive sectors (Energy and Utilities).
  • It will only concern purchases, but divestments might also take place in the future. The BoE will also introduce increased disclosure from 2Q22 and strengthen the requirements over time.
  • The immediate market impact looks limited as the BoE is no longer increasing its credit holdings; hence the new framework only applies to reinvestments, currently worth EUR500m a month.
  • Nonetheless, it is an important announcement as the BoE is the first central bank to incorporate extra-financial criteria into its asset purchase programs. It will likely serve as a reference for the ECB that is due to start applying climate criteria to its credit purchases in the second half of 2022 and it will be a market mover.

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