Bank of England Bans Thermal Coal Bonds as Collateral for Loans

Climate campaigners have declared a victory after the Bank of England said it would no longer accept bonds linked to one of the most polluting industries on the planet for key loan arrangements.

The ban, which comes into force in October, marks a fresh crackdown on thermal coal, which is burned in power plants to create electricity, and has long been a target of green policy activists.

The Bank’s new policy suggests that bonds linked to thermal coal are now too risky to sit on its balance sheet, as an international shift away from dirty fossil fuels towards greener energy could end up wiping out their value.

“It’s a strong signal from a central bank, and to the market as well,” Ellie McLaughlin, a senior policy and advocacy manager at the campaign group Positive Money, told the Guardian.

Earlier this summer the Bank of England quietly announced it would no longer let commercial banks use bonds linked to the thermal coal as “collateral” when they borrowed money from the central bank.

The central bank regularly issues loans to commercial banks such as Barclays, Lloyds, NatWest and HSBC to ensure they can settle transactions and keep operations running smoothly. Those commercial banks have to provide collateral, usually in the form of bonds, as a guarantee, meaning they would be kept by the central bank if they failed to repay their loans.

About 150 of the world’s largest financial companies already have some sort of restrictions on how they do business with the thermal coal industry, according to figures published by the Paris-based non-profit Reclaim Finance last September.

However, activists are hoping the new policy will force commercial banks to rethink holding assets linked to thermal coal – which is one of the most polluting fossil fuels on the planet – on their balance sheets.

The Bank of England explained in its policy statement that thermal coal companies “can be exposed to potential financial risks connected to the adjustment of the economy towards net zero”. It added that the Bank would also discount the value of bonds in other relevant sectors “to protect the Bank against financial risks”.

The policy is far more strict than those currently adopted by most of its western counterparts, including the European Central Bank. However, the Bank of England made little fanfare of its announcement, having quietly released the policy on its website in early June.

“The Bank of England has been much less vocal about this and its wider climate work in recent years, for kind of various reasons,” McLaughlin said.

It comes amid a US-led backlash against green policies that have forced most financial companies to row back on their climate goals since Donald Trump returned to the White House. “It does make that environment within which they operating much more difficult,” McLaughlin added.

However, how effective the Bank of England’s policy is will depend on its design.

“We’ve yet to see how the Bank will calculate haircuts to account for climate risks, and exclusions should extend beyond thermal coal to cover all ‘always harmful’ activities,” McLaughlin said, including any fossil fuel expansion or deforestation.

“It’s quite significant, but there are definitely a lot of areas where the Bank could be going further.”