In a decisive move to tackle climate-related financial risks, the Bank of England has declared that, starting October, it will cease accepting bonds tied to thermal coal companies as collateral in its lending operations. This decision underscores the central bank’s commitment to mitigating the financial impacts of climate change.
Bonds serve as collateral for commercial banks, including major lenders, when they borrow from the central bank to maintain daily operations and facilitate transactions. With the new policy, bonds associated with thermal coal, a fossil fuel predominantly used in electricity generation, will be excluded from eligibility.
The Bank of England highlighted that companies involved in the thermal coal industry are increasingly vulnerable to financial risks as global efforts intensify towards cleaner energy and achieving net-zero emissions. Consequently, assets linked to coal could depreciate significantly over time.
Beyond thermal coal, the central bank will now also have the authority to apply discounts to bonds from other industries susceptible to climate risks, thereby safeguarding its balance sheet from potential losses. This move has been well-received by environmental groups, who argue that it sends a powerful message to financial markets and may incentivize commercial banks to reduce their stakes in highly polluting sectors. Over 150 leading financial institutions globally already restrict business activities related to the thermal coal industry.
Experts suggest that the policy’s success will largely depend on the assessment of climate risks and whether similar strategies are expanded to encompass other environmentally damaging sectors in the future.