Key facts
- The Bank of England will stop accepting bonds linked to thermal coal for key loan arrangements starting in October.
- This policy change aims to mitigate financial risks associated with the transition to a net-zero economy.
- Commercial banks must provide collateral, typically bonds, when borrowing from the central bank.
- The Bank of England's new stance is seen as a significant signal to the market by climate activists.
- The policy is more stringent than that of the European Central Bank.
The Bank of England has announced it will no longer accept bonds linked to thermal coal for its key loan arrangements, a decision climate campaigners are celebrating as a significant victory. This new policy, set to take effect in October, targets one of the most polluting fossil fuels and reflects a growing international shift away from carbon-intensive energy sources.
The central bank's decision suggests that bonds tied to thermal coal are now considered too risky for its balance sheet, given the potential for their value to be diminished by the global transition to greener energy. Commercial banks, such as Barclays, Lloyds, NatWest, and HSBC, typically provide these bonds as collateral when borrowing funds from the Bank of England to ensure smooth transaction settlements.
According to figures from the non-profit Reclaim Finance, approximately 150 of the world's largest financial companies already have some form of restrictions on dealing with the thermal coal industry. Activists hope the Bank of England's new policy will prompt commercial banks to re-evaluate holding such assets. The Bank of England explained that thermal coal companies face financial risks due to the economy's adjustment towards net zero and that it would discount other relevant sector bonds to protect against financial risks.
This policy is notably stricter than those adopted by many Western counterparts, including the European Central Bank. However, the Bank of England made little public announcement of the change, quietly releasing the policy on its website in early June. This subdued approach comes amid a broader US-led backlash against green policies, which has reportedly made the operating environment more challenging for financial companies seeking to meet climate goals.