The Bank of England Is Moving Away From Coal

Environmental advocates have been urging financial institutions to divest from fossil fuels for years, with efforts intensifying since the Covid-19 pandemic and the global drive to transition away from oil, gas, and coal towards renewable energy. In June, the Bank of England quietly announced it would cease accepting bonds related to coal operations for significant loan arrangements.

This ban will take effect from October. The move represents a recent step in encouraging a shift away from thermal coal for electricity generation. The Bank stated that it would no longer permit commercial banks to utilize bonds linked to thermal coal as collateral when borrowing funds. This decision suggests that any bonds tied to thermal coal are now deemed too risky for inclusion on their balance sheet, as consumers and governments worldwide advocate for a transition away from the dirtiest fossil fuel.

The swift global shift to renewable energy could cause certain types of fossil fuels to lose value over the next few decades, rendering them more financially risky. The Bank of England explained that thermal coal firms could be susceptible to potential financial risks arising from the economy's transition towards net zero, according to its policy statement.

It also indicated that it would reduce the value of bonds in related sectors to safeguard against financial risks. It is standard practice for the Bank of England to provide loans to major UK banks, such as Barclays, Lloyds, NatWest, and HSBC, to facilitate smooth transactions and business operations. These commercial banks must offer collateral as a guarantee, typically in the form of bonds.

Although many financial institutions have already imposed restrictions on the thermal coal industry, the Bank of England's new policy is more stringent than that of similar institutions, like the European Central Bank. However, the move received little attention due to the Bank's restrained communication style, opting for a website announcement instead of a formal public statement.

This cautious approach to climate action stems from various factors, including pressure from the United States government to prioritize continued fossil fuel development over renewable energy. Ellie McLaughlin, a senior policy and advocacy manager at the Positive Money campaign group, noted that the Bank's decision serves as a strong signal to the market, but emphasized that there are still areas where the Bank could do more.

Over recent years, the Bank of England has implemented numerous modifications to its bond schemes and other financial mechanisms to support the global green transition and mitigate risks linked to specific fossil fuels. On its website, the Bank stated that in 2021, they began adjusting the CBPS to facilitate an orderly, economy-wide transition to net zero, provided they maintain their primary monetary policy objectives, protect public funds, and base adjustments on reliable metrics.

This change occurs less than a year after a study revealed that no major banks had yet pledged to cease funding new oil, gas, and coal projects. A report published in October by the TPI Global Climate Transition Centre at the London School of Economics and Political Science indicated that most banks that recently revised their climate policies had subsequently weakened them.

The report, which examined the climate strategies of 36 of the largest banks globally, found that banks are still in the early stages of their decarbonization efforts, with targets focusing on a limited range of sectors and activities. The report concluded that banks have weakened their disclosures regarding net zero commitments, financing conditions for high-emission sectors, and fossil fuel policies.

While several major banks have not committed to ending funding for new fossil fuels, some are distancing themselves from coal. Currently, over 200 globally influential financial institutions have established formal divestment policies restricting investment in thermal coal mining and/or coal-fired power projects, encompassing asset managers, asset owners, international banks, and other financial entities, according to the Institute for Energy Economics and Financial Analysis.

As more banks recognize the increasing financial risks associated with long-term investment in more-polluting fossil fuels, they are restricting their ties to the coal industry. This could inspire other financial institutions to follow suit in the years ahead, potentially leading to increased involvement in alternative energy sources, such as renewables.