Bank of England admits bond portfolio out of step with Paris climate goals

The Bank of England has revealed that parts of its investment portfolio currently support up to 3.5C of global warming by the end of the century, a rise in average temperatures that would shoot far over the 'well-below' 2C upper limit goal of the Paris Agreement and which scientists believe would incur catastrophic climate impacts on the planet.

The central bank published for the first time on Thursday an assessment of the climate risks it faces, in keeping with the requirements of the international Task Force on Climate-related Financial Disclosures (TCFD) which its former governor Mark Carney played a key role in establishing. 

The report shows the Bank of England (BofE) has cut emissions from its own activities - which include printing banknotes, building and business travel - by a third since 2016.

However, it also reveals that the Bank continues to finance carbon-intensive activities that undermine the climate goals agreed by world leaders at the landmark 2015 UN climate summit in Paris, despite almost all countries including the UK having signed up to the accord.

Andrew Bailey, the bank's governor, conceded that there "remains a gap between the associated carbon outputs" of the Bank of England's holdings and the Paris goals. The discrepancy, he conceded, "demonstrates the additional work needed to meet the UK's goal of net-zero emissions by 2050".

The Bank's largest portfolio, the Asset Purchase Facility Fund's sovereign government bond portolio, currently has an average carbon intensity of 202 tonnes of carbon dioxide equivalents "per £ million of GDP", the report reveals. Moreover, the Asset Purchase Facility's corporate portfolio is on track to chart a whopping global temperature increase of 3.5C, more than double the 1.5C limit widely seen as requiring net zero emissions to be achieved by 2050.

For its part, the BofE flagged that its carbon footprint still remains below the 336-tonne CO2 average of G7 institutions' portfolios, but it also conceded that "despite this favourable starting position, the pace of change in the United Kingdom will need to will need to increase to meet forward-looking national and international climate targets".

The Asset Purchase Facility holds the largest proportion of the bank's asset portfolios, at 96 per cent. As of February 2020, 98 per cent was invested in sovereign government bonds and two per cent in sterling corporate bonds.

In his forward to the disclosure report, Bailey said that it was "vital that the Bank continues to lead on the financial risks from climate change". He added: "The Bank sits at the heart of the financial system and so it is important we hold ourselves to the same high standards as the firms we regulate."

Large Britsh companies may also soon have to follow suit in disclosing the risks posed to their business by climate change and the net zero transition under new rules curently proposed by the Financial Conduct Authority, one of the Bank's regulatory arms.

Commenting on the findings, Ben Caldecott, director of the Univesity of Oxford's Sustainable Finance Programme, further pointed out that the BofE's climate risk disclosures today only account for its "much smaller non-gilt corporate holdings", but not for its gilt holdings.

The disclosure includes a initial "portfolio warming potential" analysis, but only for its much smaller non-gilt corporate holdings. That is 3.5 degree aligned. Begs the question: what does @bankofengland think is the portfolio warming potential of their gilt holdings?

— Ben Caldecott (@bencaldecott) June 19, 2020

It follows criticism of the Bank of England from campaigners, economists and business leaders over loans and financial support it has handed to struggling high carbon industries in the wake of the coronavirus crisis. EasyJet, British Airways, Rolls Royce and oilfield companies Baker Hughes and Schlumberger have all secured financial support from the central bank without having to make any climate action commitments in return, despite fears this could lock-in emissions for years to come.

Earlier this week, meanwhile LSE and SOAS universities warned that central banks across the globe were failing to account for climate risks in their response for Covid-19. The researchers said they were unable to identify any monetary or prudential policy crisis responses that have been "calibrated in sustainability-enhanced ways".

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• Topics
• Risk
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• Green recovery
• Bank of England
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• Task Force on Climate-related Financial Disclosures
• climate risk