April 29, 2020
Bank of England fails to exclude buying fossil fuel assets
Professor Brian Sturgess. University of Buckingham and Economic Adviser to Envirotech

The Bank of England is missing out on a crucial opportunity to nudge the British economy further in a green direction through its asset purchasing scheme for corporate bonds. The Bank is to double its current holding of £10 billion in corporate debt as part of its expanded £645 billion quantitative easing programme to stimulate an economy devastated by the corona virus lockdown. The Bank’s programme is administered by its Monetary Policy Committee (MPC) and the Bank has published the list of eligible corporate bonds available to buy on its website and it includes a number of large fossil fuel dominated energy companies. Bonds issued by subsidiaries of oil and gas companies Total, BP, Royal Dutch Shell and Centrica might all be acquired by the Bank to provide liquidity in the financial system.  

The inclusion of fossil fuel companies on the Bank’s list contradicts an earlier statement made by the Bank of England governor Andrew Bailey to the Treasury Select Committee of MPs that the Bank would seek to move away from ’market neutrality’ in its corporate asset buying activity as a “priority.” The incoming governor was responding to questions about an open letter signed by 101 economists, ex-central bankers and investment financiers urging central banks to use asset purchasing in a directed fashion to raise the cost of capital of companies extracting fossil fuels relative to that of renewables to meet net zero targets. 

Admittedly Andrew Bailey told the Treasury Select Committee that although there was a “strong argument” to shift its corporate bond buying programme in a carbon neutral direction, the composition and risk of the portfolio have to be agreed with the Treasury.  A Bank spokeswoman blandly told The Guardiannewspaper. “The MPC’s actions are guided by statutory objectives and a remit set by parliament and the government of the day. These objectives are for the economy as a whole and are not specific to particular sectors. The government’s latest remit letter does not specify a climate objective.”

Despite his claim that a change in direction would be a “priority” nothing has been actioned and now that the Bank has doubled the size of its corporate war chest in response to the current crisis its ability to influence the direction of future economic growth in a green direction is even greater. This inaction contrasts strongly with the Bank’s climate change policy under the previous governor Mark Carney, who recognised that climate change could present a ‘systemic risk’ to the stability of the financial system. Carney was instrumental in the creation of the Network for Greening the Financial System (NGFS), a coalition of 34 central banks and supervisors – representing five continents, half of global greenhouse gas emissions and the supervision of two-thirds of the global systemically important banks and insurers in 2017.

In an open letter published in April 2019 by the Bank of England, Mark Carney and François Villeroy de Galhau, governor of the Bank of France, chairman of the NGFS, recommended that “central banks are encouraged to integrate sustainability into their own portfolio management.” By buying the corporate debt of companies with green incentives and ignoring those deemed to be harmful to the environment, economic incentives are created that will speed up the progress towards Net Zero by 2050. Bond and equity markets will emulate central bank actions. Rick Reider, BlackRock’s Global Chief Investment Officer for Fixed Income recently stated that the fund manager would follow the Fed and other central banks “by purchasing what they’re purchasing, and assets that rhyme with those.” 

BlackRock has over US$6.5 trillion of assets managed and CEO Larry Fink had already told its investors that the fund would relocate its holdings away from fossil fuel companies in a client letter published this January.

The corona crisis, tragic in its human consequences and damaging in its impact on the economy and employment, does give a chance for policy makers to shift direction. Central banks and finance ministries across the world have responded to the pandemic in an unprecedented way - in simple terms because they can when the political will is there and the population is behind them. The threat of climate change has not gone away with the decline in economic activity only the pause button has been pressed. When activity returns it behoves us all to recognise that activity can be purposeful.  Economic growth and GDP has a direction as well as a magnitude. Unfortunately, the Bank of England under its current governor is floundering.

 

Brian Sturgess

University of Buckingham


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