The Bank of England (the “Bank”) has published details on how it will green its Corporate Bond Purchase Scheme (the “Scheme”). Its approach will be the first to take the climate impact of issuers into account.
The Scheme was launched in August 2016 and expanded in 2020. It imparts monetary stimulus by lowering the yields on corporate bonds, thereby reducing the cost of borrowing for companies. The Bank will be reinvesting the cash flows associated with the reductions in the stock of sterling non-financial corporate bond purchases back into eligible corporate bonds. The reinvestment operations are due to begin on 24 November 2021.
The Greening Approach
In order to be eligible for purchase of bonds, issuers must make a material contribution to economic activity in the UK. The Bank announced on 5 November that for the first time, it will also take into account the climate impact of issuers. The Bank’s approach will centre on three principles: (1) incentivising firms to take decisive actions that support an orderly transition to net zero; (2) leading by example, while learning from others; and (3) ratcheting up their own requirements over time as data and metrics improve.
Firms in high-emitting sectors (energy, electricity, gas and water) must have published an emissions reduction target, in order to be eligible for purchase. Firms which generate any revenue from mining thermal coal will be ineligible, and firms which generate any revenue from using thermal coal will be ineligible for purchase unless they meet certain criteria.
Purchases will be skewed in favour of issuers that are performing strongly in support of net zero and are responding most to the Bank’s incentives. A scorecard allocating firms to different climate buckets will be used to assess their performance across multiple climate metrics. This will drive the Bank’s investment decisions via the price the Scheme is prepared to pay for an eligible issuer’s bonds.
The sterling corporate bonds of the eligible issuers must have the following characteristics:
- Conventional senior unsecured or secured, unsubordinated debt.
- Bonds rated investment grade by at least one major rating agency and subject to the Bank’s assessment process.
- Cleared and settled through Euroclear and/or Clearstream.
- Minimum amount in issue of £100 million.
- Minimum residual maturity of twelve months; no perpetual debt.
- At least one month since the security was issued.
Securities will need to be admitted to official listing on the London Stock Exchange (LSE) or an EU stock exchange or, in the Bank’s discretion, on a multi-lateral trading facility operated by the LSE or by a recognised stock exchange regulated in the EEA.
The Bank has allocated each currently eligible bond to a sector and will aim to purchase bonds such that the Scheme’s holdings are representative of each sector’s share of the list of eligible bonds, whilst avoiding over-concentration in particular sectors or issuers.
Further details of the Scheme and the greening approach can be found here