Environmental Groups Welcome the Move

For years, environmental groups have been campaigning to encourage banks and other financial institutions to divest from fossil fuels. This push has gained momentum since the Covid-19 pandemic and the global shift towards renewable energy sources. The Bank of England’s recent decision to no longer accept bonds associated with coal operations for key loan arrangements marks a significant step in this direction.

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The Ban Takes Effect in October

The ban on accepting bonds linked to coal operations will be enforced from October. This move suggests that the Bank of England considers such bonds too risky to appear on its balance sheet. The shift away from thermal coal for electricity production is gaining pace globally, with consumers and governments calling for a transition to cleaner energy sources.

As the global transition to renewable energy accelerates, certain types of fossil fuels may 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.

The Bank’s policy is stricter than that of similar financial institutions, such as the European Central Bank. However, the introduction of restrictions by such an important bank may well give commercial banks cause to reconsider their links to the coal industry. 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.’

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.’

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.

According to the Institute for Energy Economics and Financial Analysis, over 200 globally significant financial institutions have formal divestment policies restricting investment in thermal coal mining and/or coal-fired power projects. This includes asset managers, owners with assets under management, international banks, and other financial institutions.

While several major banks are still not willing to commit to stop funding new fossil fuels, several are turning away from coal. The Bank of England’s move is a significant step towards a cleaner, more sustainable financial sector.