Environmental groups have been campaigning to encourage banks and other financial institutions to divest from fossil fuels for years, with efforts growing stronger since the Covid-19 pandemic and the global push to transition away from oil, gas, and coal to renewable alternatives.
In June, the Bank of England quietly announced that it would no longer be accepting bonds associated with coal operations for key loan arrangements. The ban will be enforced from October. It is the latest move to encourage a shift away from thermal coal for electricity production. The Bank of England said it would no longer be allowing commercial banks to use bonds linked to thermal coal as “collateral” when borrowing money from the financial institution.
The move suggests that any bonds linked to thermal coal are now considered too risky to appear on its balance sheet, as consumers and governments worldwide call for a shift away from “the dirtiest fossil fuel“. The rapid global transition to renewable energy could lead certain types of fossil fuels to depreciate in value over the coming decades, making them more of a financial risk.
The Bank of England stated that thermal coal companies “can be exposed to potential financial risks connected to the adjustment of the economy towards net zero,” in its policy statement. It said it would also discount the value of bonds in other relevant sectors “to protect the Bank against financial risks”.
It is common for the Bank of England to provide loans to major banks operating in the United Kingdom, including Barclays, Lloyds, NatWest, and HSBC, to help them settle transactions and conduct operations efficiently. To gain access to these loans, commercial banks must provide collateral as a guarantee, typically in the form of bonds.
A wide range of financial institutions have already introduced certain restrictions on the thermal coal industry. However, the introduction of restrictions by such an important bank may well give commercial banks cause to reconsider their links to the coal industry.
The Bank of England’s policy is stricter than that of similar financial institutions, such as the European Central Bank. However, little attention has been given to the move since the Bank released the new policy on its website rather than making a formal public announcement. This quiet approach to climate action is down to a variety of reasons, including mounting pressure from the United States government to ditch renewable energy in favour of continued fossil fuel development.
A senior policy and advocacy manager at the campaign group Positive Money, Ellie McLaughlin, stated, “It’s a strong signal from a central bank, and to the market as well.” McLaughlin added, “The Bank of England has been much less vocal about this and its wider climate work in recent years, for kind of various reasons… It’s quite significant, but there are definitely a lot of areas where the Bank could be going further.”
The Bank of England has introduced a wide range of changes to its bond schemes and other financial mechanisms in recent years, aimed at supporting the global green transition and reducing the risk associated with certain types of fossil fuels. On its website, the Bank states: “In 2021, we started to 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 move comes less than a year after a study found that no major banks had yet committed to stop funding new oil, gas, and coal. A report published in October by the TPI Global Climate Transition Centre at the London School of Economics and Political Science suggested that most banks that had recently updated their climate policies had since weakened them.
The report, which analysed the climate policies of 36 of the largest banks by market capitalisation and total assets, found that “banks are still at an early stage of their transition with decarbonisation targets that cover a limited set of sectors and business activities.”
The report said banks have “weakened their disclosures in areas such as net zero commitments, financing conditions for high-emission sectors and fossil fuel policies”. Some banks had either fully withdrawn or weakened their net zero commitments, substituting firm language such as “commitment” or “target” with more ambiguous wording, such as “ambition” or “aspiration”.
While several major banks are still not willing to commit to stop funding new fossil fuels, several are turning away from coal. To date, over 200 globally significant financial institutions have formal divestment policies restricting investment in thermal coal mining and/or coal-fired power projects, including asset managers, owners with assets under management, international banks, and other financial institutions, according to the Institute for Energy Economics and Financial Analysis.
More banks are viewing long-term investment in more-polluting fossil fuels as increasingly risky, leading them to restrict their financial entanglement with the coal industry. This could encourage other financial institutions to follow suit in the coming years, and may lead to greater involvement with alternative energy sources, such as renewables.
By Felicity Bradstock for Oilprice.com
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