The Bank of England’s (BoE) Monetary Policy Committee meets today, and will publish its first Monetary Policy Report since the Bank was given an updated ​‘net zero’ mandate at the March Budget. The Bank’s role has evolved over time, in response to changes in the economy and society’s expectations. Now we are at another juncture, faced with the Covid-19 crisis as well as the deepening climate emergency – and the Bank has a key role to play in addressing both.

Amidst what was largely a disappointing budget from a climate perspective, Rishi Sunak made one major announcement: updating the Bank’s remit to support growth that is ​‘also environmentally sustainable and consistent with the transition to a net zero economy’, something that NEF has long campaigned for. The Bank’s updated mandate on climate, which also extends to its Financial Policy Committee and Prudential Regulation Authority, is a broad one, covering all the major areas of policy and regulation. This enables the Bank to act with the ambition necessary to deliver the government’s target of net zero emissions by 2050, as well as alignment with the Paris Agreement. Finance is not a silver bullet to fix environmental and climate challenges, but, due to its vast scale and influence, it is one of the single most important things to get right.

The Bank has already taken a number of first steps in the right direction. It announced a ​‘climate stress test’, which will explore the robustness of financial institutions’ finances to climate risks. Following the new green remit announcement, the Bank also committed to accounting for climate impacts when choosing which assets to buy in its corporate quantitative easing programme. It has played a major role in research and advocacy, including participating in the central bank and financial supervisors’ Network for Greening the Financial System, and setting up a Climate Financial Risk Forum. Lastly, the Bank has been working with the Treasury to make the Taskforce on Climate-related Financial Disclosures’ (TCFD) recommendations mandatory across much of the UK economy by 2025, which will improve the reporting of climate-related risks. However, while welcome, these early steps are by themselves a far from sufficient to align the UK financial system with a green transition.

Despite the Paris Agreement entering force in 2016, and the growing adoption of the TCFD disclosures, the UK-headquartered banks continue to funnel billions into dirty projects. Barclays was the worst funder of fossil investments in Europe between 2016 and 2020, and the five largest UK banks provided over $60bn a year in fossil fuels financing, with no sign of this abating over time. The BoE estimated in its 2020 climate disclosure that its corporate bond portfolio – which reflects the UK financial markets more broadly — is ​‘consistent with an average temperature increase of 3.5°C above pre-industrial levels by 2100’. At the same time, the UK green finance gap — the amount of additional annual investments in green infrastructure that are required to reach climate targets – remains large, estimated variously at some £11bn to £20bn annually.

The Bank must now move rapidly to green its operations. While operationally this would benefit from the UK developing a formal scheme to classify green and dirty activities (a ​‘taxonomy’), existing metrics are already sufficient to decarbonise. Beyond climate-adjusting its own balance sheet and the collateral it will accept when making loans, regulation of private finance will need to be strengthened, such as by incorporating climate risks into regulations specifying the amount of capital banks have to hold as a cushion against unexpected losses.

The Bank can also help steer private credit towards green investments and away from harmful ones, returning to the practice that was successfully utilised by many central banks – including the BoE – in the post-war period. Such ​‘credit guidance’ would not only support climate objectives. It would be instrumental in directing finance away from speculative activities and towards job-creating SMEs and projects, by making credit for sustainable investments cheaper, and restricting credit going towards dirty and unproductive ones. In such way, the BoE could help to tackle the crisis of incomes and living standards and support levelling-up across the country.

Finally, to reach net zero, and to do so in a fair way, a collaborative approach between the Bank, the Treasury and other relevant institutions will be necessary. To ensure policy coherence and drive action, the government should set up a Green Finance Action Taskforce to make the UK institutional framework fit for the low carbon transition. The Bank can, and should, become an expert and proactive advisor to government on greening finance and facilitating the transition.

Its new ​‘net zero’ mandate empowers the Bank of England to help tackle the climate crisis, while supporting new jobs and the recovery from Covid-19. It could prove to be a game-changing moment. But for that to happen, the Bank needs to embrace its green mandate with ambition matching the government’s rhetoric about the UK being a global leader on climate action.