We will adjust the CBPS to support an orderly economy-wide transition to net zero, subject to maintaining its primary monetary policy purpose, protecting public money, and basing any adjustments on robust and proven metrics.
The United Kingdom has committed to a target of net zero greenhouse gas emissions by 2050. In order to achieve that, companies’ incentives must be aligned with this national goal. Governments have the most powerful tools to affect these incentives through laws, regulations, taxes and subsidies. Government policy, and companies’ actions in response, will therefore be the primary driver of climate transition. However lenders and financial market investors can play a supporting role, by allocating finance in a way that further sharpens companies’ incentives to reduce emissions, contributing to an orderly transition to net zero.
The Corporate Bond Purchase Scheme (CBPS) was introduced in 2016, and purchases investment grade sterling corporate bonds issued by companies judged to make a material contribution to UK economic activity. The Scheme is a monetary policy tool, and so its size is determined by the Monetary Policy Committee (MPC) as part of its monetary policy decision making in order to achieve its inflation target. For as long as the MPC maintains its target for CBPS holdings, the Bank will undertake periodic reinvestment operations to replenish the Scheme as bonds mature. One such operation took place in late 2019, and another will start in November 2021. It is possible the target stock of corporate bonds could be raised again in future, were the MPC to judge further asset purchases to be appropriate. But ultimately, as economic conditions permit, the MPC would likely allow the CBPS to wind down. We do not therefore expect to be a permanent investor in corporate bonds.
While the MPC continues to vote to maintain the stock of bonds held by the CBPS the Bank will remain a relatively small, though influential, investor in marketable sterling corporate debt. In March 2021, the Chancellor updated the MPC's remit to confirm that the economic strategy of the Government – which the MPC is expected to support as a ‘secondary objective’ – includes supporting the transition to a net zero emissions economy. This requires us to adjust the composition of CBPS investments to support transition to net zero, without undermining the Scheme’s primary monetary policy purpose. Doing so is also consistent with increasingly persuasive evidence that market prices materially under-estimate the risks and opportunities associated with climate change.
In May 2021, we published a discussion paper exploring options for greening the CBPS. We would like to thank all those who provided feedback as to how best to do so, including experts in climate-conscious investing, climate groups and the general public. In the more detailed material below we have indicated how this feedback has helped us to shape our final framework.
Figure 1.1 summarises our approach to greening the CBPS.
It shows how we will deliver against our three high-level principles: (1) that we will incentivise firms to take decisive actions that support an orderly transition to net zero; (2) that we will lead by example, while learning from others, and; (3) that we will ratchet up our requirements over time as data and metrics improve.
We will put these principles into action by using four tools, calibrated to complement each other. Firms will now need to satisfy climate-related eligibility criteria for their bonds to be purchased by the CBPS, with purchases then being “tilted” towards those eligible firms which are the stronger climate performers within their sectors. Our approach will be consistent with targeting a 25% reduction in the carbon intensity of the CBPS portfolio by 2025, on the way to full alignment with net zero by 2050. And our escalation approach will see the requirements we put on firms increase over time and actions – including reduced purchases, removal of eligibility or even divestment – taken against weaker performers.
The first step in this process will occur via purchases to top CBPS holdings back up to £20bn, as per the target currently set by the MPC, starting in November 2021.