The Bank of England’s new formalised commitment to contributing to the fight against climate change has been met with mixed responses. James Jackson and Daniel Bailey discuss the reasons for this and look at whether it has led to changes in the Bank’s outlook and actions thus far.

In 2021, the Bank of England received an update to its mandate to “facilitate the transition to Net Zero”. It was announced with significant fanfare, coming to be referred to as one of the world’s first “environmental mandate” for a central bank, aligning the monetary and fiscal institutions of British politics in the face of the grand challenge of averting climate change. The mandate did not, however, mark the beginning of the Bank’s embrace of environmental sustainability. On the contrary, the Bank had begun to consider climate risk as early as 2015, with several climate policies following suit some years later.  Yet, despite these initial steps, we find that there remains still some way to go for the Bank of England to align the financial system with the UK’s Net Zero objectives.

In a recent article, we explore how the Bank’s renewed mandate is viewed by those in the Treasury and monetary policy experts, drawing on interviews.

Why a Net Zero mandate?

We found that rather than something that was imposed upon it by the Treasury, the Bank actively lobbied for this update to reflect work currently underway across its various institutions. The Bank had already established the Climate Hub in 2016 and a Climate Financial Risk Forum in 2019. The former was designed to incorporate environmental considerations into the Monetary Policy Committee (MPC), Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA) in what was described as a “hubs and spokes” model. Likewise, the latter is a platform for the representatives of the financial sector to gain a greater understanding of the financial risks of climate change, or the climate-related financial risk (CRFR), for the bank to consider when refining its monetary policies and macroprudential regulation.

Rather than something imposed upon it by the Treasury, the Bank actively lobbied for this update

Beyond the internal mechanics of the Bank, the broader “climate shift” amongst central banks is often thought to have followed Mark Carney “Breaking the tragedy of the Horizon” speech in 2015 when he was governor of the Bank of England. There Carney expressed fears that unchanged monetary policy would incur a “climate-driven Minsky moment” should central banks continue to ignore the profound risks climate change poses to the financial system. Under Carney’s tenure, the Bank was a founding member of the Network for Greening the Financial System, a network of Central Bank and financial regulators that aimed to “integrate the monitoring of climate-related financial risks into day-to-day supervisory work”. The group is now 114 strong.

Contrasting perceptions

Perceptions of the mandate varied among our interviewees, with some considering it to simply reflect what they considered to be the Bank’s market-leading work on CRFR, and others who deemed it to be an unwelcome imposition for an institution to have to consider climate change. Between these two positions, we found that the mandate was an instance of “strategic ambiguity” which simultaneously allowed the Bank to interpret its responsibility as it saw fit as opposed to a rigid set of demands it should fulfil.

There was a growing recognition amongst the Bank’s publications of the importance of climate change, with representatives mentioning “Net Zero” 17 times since 2016. What is more, the Bank now publishes a climate-related financial disclosure report annually that outlines the present modelling of the effects of climate change and the measures the Bank is taking to avert the associated risks.

In terms of demonstrable policy changes, the mandate is indicative of a broader suite of measures implemented by the Bank, such as its climate stress testing, climate exploratory scenario exercises and decarbonising 25 per cent of corporate asset holdings to address the “carbon biases” held since the Global Financial Crisis. Yet, the Bank’s attempts to address its bias have recently been the source of criticism, with the Bank being accused of being “distracted” by its environmental concerns when it should have paid more attention to the impending inflation it is now struggling to address.

Accusations of the Bank being distracted by its environmental mandate, would, we argue, overstate its action on the mandate, however. Indeed, our analysis found these actions far from aligned with Net Zero at present. Rather, the mandate has not instigated an overhaul of the Bank’s monetary and financial operations, but instead been siloed into a subject primarily for the concern of the FPC. The implications of this, we argue, are that it discounts the prospect of the Bank either directly or indirectly financing  the Net Zero transition through a form of green Quantitative Easing QE or even allowing the UK government to finance the transition to Net Zero through its “Ways and Means Facility” deployed in recent years.  That is because the data indicates that climate change is not the concern of the MPC, the body at the bank concerned with such matters, but has instead been siloed into the FPC, thus reducing climate policy primarily to managing CRFR through information gathering and disclosure requirements. Furthermore, the Bank continues to preside over a loose regulatory regime that has allowed the City of London to increasingly provide credit to fossil fuel companies, omitted environmental considerations from its collateral framework and refused to further decarbonise assets on its balance sheet, all since the UK committed to Net Zero.

The Bank does not perceive climate change to be something it must act upon to avert the associated climate and ecological impacts, but only something it should “have regard for”

Any action on climate change remains subject to the pre-existing logic of maintaining monetary and price stability. The Bank does not, therefore, perceive climate change to be something it must act upon to avert the associated climate and ecological impacts, but only something it should “have regard for” when it presents a risk to financial stability. We would therefore warn against expecting the Bank to undertake Early Action (EA) according to its own scenario analysis. The data indicates it is far more likely to adopt a Late Action (LA) approach, whereby it seeks to ensure that it does not burst carbon asset bubbles, nor inflate green asset bubbles.

Given that the Bank of England should now be a facilitator of the UK’s Net Zero transition, the fact that it remains misaligned from its environmental targets is an indictment of its actions, or lack thereof, thus far. As such, we consider it reasonable to suggest that whilst the mandate is not an insignificant development in British climate governance, contrary to recent detractors, the Bank should focus far more on facilitating the UK’s transition to Net Zero, not less.

This post draws on the analysis contained in the authors’ article “’Facilitating the transition to net zero’ and institutional change in the Bank of England: Perceptions of the environmental mandate and its policy implications within the British state” published in the British Journal of Politics and International Relations.

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.

Image credit: Photo by Michelle Henderson via Unsplash.