The Bank of England is set to cease accepting bonds from companies associated with thermal coal as collateral for its lending operations starting in October. This move underscores the central bank’s commitment to addressing the financial risks posed by climate change.
In the routine operations of borrowing money from the central bank, commercial banks, including some of the largest lenders, typically use bonds as collateral. However, with the new policy in place, bonds linked to thermal coal—a fossil fuel primarily used in power plants for electricity generation—will be excluded from eligibility.
The Bank of England highlighted that companies involved with thermal coal are increasingly facing financial challenges as the global shift towards cleaner energy and net-zero emissions accelerates. Consequently, assets related to coal are at risk of depreciating over time. To further safeguard its balance sheet, the central bank will also implement discounts on bonds from other sectors vulnerable to climate risks.
The decision has been met with approval from environmental groups, who believe it sends a strong message to financial markets and could incentivize commercial banks to lessen their investments in heavily polluting industries. Already, over 150 major financial institutions globally have imposed limits on business dealings connected to the thermal coal sector.
Analysts suggest that the policy’s success will hinge on the assessment of climate risks and whether similar strategies will be applied to other environmentally detrimental activities in the future.
