The Bank of England's climate-related financial disclosure 2021

Foreword

We have all been through a year like no other in recent history. While the Covid-19 (Covid) pandemic put our health and economic systems under enormous pressure, our environmental systems were afforded a brief respite.^{footnote [1]} As we look ahead to a year marked by vaccinations and economic recovery, that respite may prove to be very short lived.^{footnote [2]} It is therefore imperative that consumers, businesses, investors, and policymakers make informed choices that put us on the path to net zero through a green recovery. There are many challenges to solve to make this happen, but effective and widespread climate disclosure across the economy is an essential ingredient for success.

It is against this background that the Bank of England is publishing its second annual climate disclosure report, following the publication of its inaugural report in June 2020. We were one of the first central banks to make this step, and the first to include coverage of financial assets held for monetary policy purposes. I was delighted to see the Bank of England’s work on this report recognised through the Green Initiative award from Central Banking.

This year we have taken our report even further. We have refreshed our climate strategy, reflected updates to the remits given to our policy committees by government, further embedded climate change within our governance and risk management frameworks, made progress on reducing emissions from our physical operations, and enhanced our analysis of the climate risks in our financial asset holdings using the latest data and modelling techniques.

Despite the challenges posed by Covid, we have delivered on our climate commitments. One of the very first climate commitments I made was to the Treasury Select Committee at my appointment hearing in March 2020, where I set out that we would consider how our corporate bond holdings could be adapted to take the climate impact of issuers into account while still meeting our monetary policy objectives. In May 2021, we published a Discussion Paper on how we could do this, and we plan to start implementing our new approach before the end of this year. This is an unprecedented step for a central bank. We have also given banks and insurers until the end of this year to embed fully the climate-related supervisory expectations we set them in April 2019. In addition, following the innovative framework that the Bank of England published in December 2019, we have launched an exploratory exercise designed both to drive better management of climate risks and to assess the resiliency of UK banks, insurers and the wider financial system to different climate scenarios.

We have sought to deliver not just through our own actions but also in support of others. Internationally we continue to play a leading role in climate-focused groups such as the Network for Greening the Financial System and the Sustainable Insurance Forum, as well as the climate-related workstreams of the Financial Stability Board and standard setting bodies such as the Basel Committee on Banking Standards. We have also worked closely with the Government on the climate agenda more broadly, including supporting the UK’s presidency of the G7, the upcoming UN COP26 conference, and the development of a roadmap to mandatory climate disclosures across the UK economy.

This year’s report shows that emissions from our physical operations, such as powering our buildings, printing banknotes, and air travel, reduced by just over half in 2020. While this was in part due to the impact of Covid restrictions on air travel, the largest contribution to the reduction came from our shift to renewable electricity. We remain on course to meet our ambitious target of reducing emissions by 63% from 2016 to 2030, a level of reduction consistent with the goals of the Paris Agreement and industry best practice. In addition, this year we have gone further and made a new commitment to achieve net-zero emissions from our physical operations by 2050 at the latest.

In terms of our financial operations, the vast majority of our financial assets are held in UK government bonds, which, consistent with the emissions profile of the UK, have the second lowest carbon footprint of government bonds among G7 nations. Furthermore, we have been providing advice on the development of the UK Government’s green gilt framework, ahead of its planned issuance of sovereign green gilts. We also hold a portfolio of corporate bonds for monetary policy purposes. The composition of our corporate bond holdings is reflective of the underlying market and so the associated emissions are not yet aligned with the goals of the Paris Agreement. However, our new approach for managing our corporate bond holdings will, alongside the actions of other investors, create incentives for all companies to transition to net zero.

As we look ahead to a decade that climate science tells us must deliver real climate action, the Bank of England will continue to play its part. Key to our success will be turning novel climate-related work such as disclosures and supervisory expectations into business as usual operations. This year’s report represents another big step on that journey.

Andrew Bailey
Governor of the Bank of England

Statement by the Chair of Court

The interconnections between our planet, our economy, and our financial system have perhaps never been more visible than over the past year. Climate change will leave none of these untouched and so the ambition of our response as individuals and institutions must rise to the challenge. The Bank for its part has played a formative role in raising climate change to the top of central banks’ and regulators’ agendas, as well as the boardrooms of banks and insurers. This climate disclosure report sets out a comprehensive assessment of the risks climate change poses to the Bank’s mission and its plans to address them. I am very proud of the leadership the Bank has and continues to show on this issue both domestically and internationally as we embark on a decisive decade for climate action.

Bradley Fried
Chair of the Court of the Bank of England

Executive summary

The Bank of England (the Bank) published its first climate-related financial disclosure report in June 2020. The Bank’s financial asset portfolios held for monetary policy purposes were included in the report, a first for a central bank, and led to the Bank receiving the ‘Green Initiative’ award from Central Banking.

This year’s report builds on the first by reflecting: the progress we have made on our climate work plan over the past year; changes in the remits and recommendations to the Bank’s policy committees; advances in climate data and modelling applied to our financial asset portfolios; progress on reducing emissions from our physical operations; and movement in the domestic and international climate agenda.

In response to these developments, we have refreshed our climate strategy and further embedded climate change into our internal governance and risk management frameworks. In addition, we have continued our work to reduce emissions from our physical operations such as powering our buildings, and are proceeding with plans to adopt a new approach to our holdings of corporate bonds in our financial operations that takes account of the climate impact of issuers.

Despite the significant progress to date, and reflecting the challenges climate change continues to present, the Bank’s climate work plan remains ambitious. We will focus our efforts on where we can make the biggest contribution domestically and internationally, while fulfilling the obligations under our remits and mandate.

As with our first climate disclosure report in 2020, this year’s report follows the structure recommended by the Financial Stability Board’s (FSB’s) Task Force on Climate-related Financial Disclosures (TCFD), covering four key elements: governance; strategy; risk management; and metrics and targets.

Governance:

Climate-related risks (hereafter ‘climate risks’) are incorporated within the Bank’s internal governance and risk management frameworks, complemented by climate-specific processes where appropriate. As part of this, climate risks are discussed regularly at the Bank’s senior executive committees prior to decisions being implemented by management across the Bank. To ensure there are clear roles and responsibilities, the Bank has assigned an Executive Sponsor for climate change – this position is held by Sarah Breeden, Executive Director for UK Deposit Takers Supervision. In 2021, the Bank also assigned the Executive Sponsor the Senior Management Function (SMF) responsibility for climate change, consistent with our supervisory expectations of banks and insurers. Alongside Sarah Breeden, the Bank has appointed Chief Operating Officer, Joanna Place, as Executive Committee Sponsor for climate change across the Bank’s internal operations. Furthermore, in 2020 an Executive Directors’ Climate Steering Group was established to facilitate cross-organisational discussions on climate change.

Strategy:

The risks from the physical effects of climate change and the transition to a net-zero economy are relevant to the Bank’s mission to maintain monetary and financial stability. In particular, these risks pose a threat to the stability of the wider financial system, and the safety and soundness of firms we regulate. As such, climate change continues to be a strategic priority for the Bank. Our objective is to: ‘play a leading role, through our policies and operations, in ensuring the financial system, the macroeconomy, and the Bank are resilient to the risks from climate change and supportive of the transition to a net-zero economy’.

This objective is underpinned by recent clarifications of the relevance of climate change and the transition to a net-zero economy in the remits and recommendations letters of the Bank’s policy committees, as set by the Chancellor of the Exchequer.

Our climate strategy is built around playing our part across five key goals:

Delivering against these priorities, as set out in the Strategy chapter of this report, will fulfil the Bank’s role in building system-wide resilience and supporting the transition. We will assess our progress against these priorities.

Risk management, metrics and targets:

The Bank is itself exposed to climate risks across both its physical operations (eg emissions from its buildings and travel) and its financial operations (eg financial asset portfolios held for monetary policy purposes). This report sets out our measurement and management of these risks.

This year the Bank has added climate risk as a ‘key risk’ within its risk management framework, becoming part of the Bank’s standard procedures for assessing and reporting material risks to the Bank’s Audit and Risk Committee on a quarterly basis. The metrics reported may evolve over time to reflect the fast pace of development in the field.

The Bank’s financial operations:

The Bank seeks to demonstrate best practice for transparency over climate risk by undertaking and disclosing climate risk analysis across the entirety of its financial holdings, including portfolios held for policy purposes. By far the largest proportion of these holdings (97%) are in a separate legal vehicle, indemnified by HM Treasury, to implement the Monetary Policy Committee’s (MPC’s) asset purchase programme. This is known as the Asset Purchase Facility (APF). Of this, 98% is invested in UK sterling government bonds (gilts) and the other 2% in sterling corporate bonds, purchased by design in proportion to total outstanding sterling corporate bond issuance in eligible sectors – delivering a portfolio broadly reflective of the market.

Carbon emissions associated with these holdings have fallen compared with last year’s report. This does not reflect the large but temporary economy-wide reduction in emissions associated with Covid lockdown restrictions in 2020, as lags in emissions reporting mean the carbon intensity data used predate that period. We measure these emissions using the weighted average carbon intensity (WACI) metric recommended by the TCFD. The WACI for the APF gilt portfolio was 222 tonnes of carbon dioxide equivalents per £ millions of GDP (tCO₂e/£m GDP) – materially below a G7 reference portfolio of 384 – and down 3% on a year earlier. The WACI of the APF corporate bonds portfolio (known as the Corporate Bond Purchase Scheme (CBPS)) was 251 tCO₂e/£m revenue – in line with the sterling corporate bond market overall – and down 9% year on year, reflecting reductions in emissions from corporate issuers.

But current emissions alone provide only a partial basis for assessing risks in financial asset holdings from climate change. Estimates of how forward-looking emissions are aligned with net-zero goals are also vital to understanding the scale of possible transition and physical risks. This year’s report improves and extends our use of these measures in three main ways: first, by presenting an updated range of static metrics of transition and physical risk exposure; second, through revised analysis of the rise in temperature consistent with the carbon emissions from our corporate holdings; and, third, through new scenario analysis to illustrate the financial risks that might stem from transition and physical risk exposures.

Static measures of exposure to physical and transition risks remain broadly similar to those in last year’s report. The transition risk of holding ‘stranded assets’ is low across the Bank’s sovereign and corporate bond holdings, reflecting among other things the limited reliance on revenues from fossil fuel extraction.^{footnote [3]} New broader measures of transition risk in our corporate holdings also appear moderate. The overall physical risk exposure of our sovereign bond holdings remains lower than for many developed countries; within that, the greatest exposure is to risks from flooding and sea level increases. Physical risks to our corporate holdings are broadly unchanged year on year and remain moderate, with higher risks driven by exposure to overseas supply chains.

Implied Temperature Rise (ITR) metrics provide one estimate of the temperature increase above pre-industrial levels with which financial asset holdings are aligned. But such measures are dependent on, and so sensitive to changes in, their assumptions and methodologies. The estimated warming of our CBPS portfolio will track that of the sterling corporate bond market given its design. One estimate has fallen year on year, from 3.5°C to 3.0°C – though this fall entirely reflects methodology improvements and remains outside of Paris-aligned goals. Other less complex methods explored in this year’s report compare firms’ published plans with Paris-aligned goals, and similarly underline the need for a whole-economy transition. In light of these findings, and following an update to the MPC’s remit earlier this year, the Bank has recently issued a Discussion Paper proposing a new framework for how our investment approach could be adjusted to support incentivising corporates in this market to transition in line with the Government’s net-zero objectives.

This year for the first time we have used scenario analysis to estimate the financial risks from transition and physical risks in our corporate holdings under different forward-looking scenarios. For transition risk, we have included estimates of how different policy measures to address climate change could affect corporate valuations. Unsurprisingly, these suggest that valuations will be affected more negatively when these policies are introduced after a delay, because the policies will then need to be tougher to meet net-zero goals. For physical risk, we have included estimates of how different scenarios may impact on probabilities of default on corporate debt securities. This analysis suggests that probabilities of default could more than double through this channel, under a scenario in which no additional policy actions are taken to reduce global emissions. These estimates remain illustrative and subject to significant uncertainty at this stage; but engaging with this type of analysis is an essential step in building the capacity to manage the forward-looking risks to financial asset holdings that arise from climate change over the longer term. The TCFD views the evolution of this kind of scenario analysis as central to improving the quality of climate disclosures over time and as ultimately supporting a more appropriate pricing of risks and allocation of capital.

The Bank’s physical operations:

The Bank tracks its carbon footprint from its physical operations. In 2020/21 the footprint reduced by 53% from 22,916 tonnes of carbon dioxide equivalent emissions (tCO₂e) to 10,843 tCO₂e; the largest decrease in the carbon footprint in a single year since it was first calculated in 2015/16.

The most significant contribution to the emissions reduction was due to the Bank’s shift to renewable sources of electricity, which we will continue to benefit from in future years. The remainder of the reduction in emissions was primarily attributable to the fall in air travel due to Covid restrictions. Although we expect some of this reduction to unwind through the course of 2021/22 as Covid restrictions are relaxed, we anticipate air travel will resume at a lower level than in previous years, with colleagues joining meetings remotely more often.

The majority of the Bank’s carbon footprint in 2020/21 came from either natural gas usage (24%) or polymer substrate used in the production of banknotes (68%). Emissions due to polymer have, however, fallen in the past year, as a result of lower production volumes and carbon-reduction initiatives implemented by suppliers. The climate impact of the Bank’s natural gas usage has been partially mitigated by the installation of a new integrated energy monitoring system, facilitating optimisation of energy use within the Bank. The Bank remains on track to meet its ambitious 2030 carbon target to reduce absolute greenhouse gas emissions by 63% from 2016 to 2030.^{footnote [4]} This target has been verified by the Carbon Trust as in line with the reduction in emissions needed to be consistent with limiting the rise in global average temperatures to 1.5°C above pre-industrial levels.

Beyond its 2030 carbon target, the Bank has also committed, for the first time, to reduce emissions from its physical operations to net zero by 2050 at the latest. This net-zero carbon target will cover the full scope of the Bank’s physical operations and is consistent with the target in the Climate Change Act 2008.

Chapter 1: The Bank’s approach to disclosure

The disclosure of climate risks and opportunities by companies helps to address climate data gaps and enables consumers, businesses, investors, and policymakers to make informed decisions. These disclosures are therefore a critical step on the path to a net-zero emissions economy. Accordingly, the Bank of England (the Bank) has sought to promote the adoption of clear, consistent and comparable climate disclosures.

Recognising the role the Bank plays at the heart of the financial system, in this report we are disclosing our own approach to climate risk management across our operations. It builds on our first climate disclosure report published in June 2020. A summary of this year’s disclosure report has also been included in our 2021 Annual Report.

We have carefully considered our approach to climate disclosure as a central bank and set out some of our key design choices below:

Framework and scope

As with our 2020 report, we have chosen to follow the structure and framework recommended by the Financial Stability Board’s (FSB’s) Task Force on Climate-related Financial Disclosures (TCFD) where appropriate. This is the main framework for companies to disclose key climate-related information. It focuses on four core elements: governance; strategy; risk management; and metrics and targets. Its recommendations provide a foundation to improve visibility of climate risks and opportunities. This report covers each of the TCFD core elements in turn, with the aim of setting out how the Bank currently considers climate risks across its governance, strategy and risk management. We also describe the metrics and targets that the Bank uses to monitor and manage those risks.

Figure 1.1: Core elements of the TCFD recommendations

Footnotes

• Source: Bank of England.

The Bank is an official supporter of the TCFD recommendations. In November 2020, the Bank, alongside others in the joint Government-Regulator TCFD Taskforce,^{footnote [5]} set out a roadmap towards mandatory TCFD-aligned climate disclosures across the UK economy. Furthermore, when the IFRS Foundation consulted on establishing a Sustainability Standards Board in November 2020, in publicly supporting the proposals, the Bank recommended that to promote global consistency, future global sustainability standards should build on the framework and recommendations of the TCFD.

We have sought to make our disclosure as wide-ranging as practical, including both the Bank’s financial and physical operations, as well as our governance, strategy and policy activities.

Data and methodological challenges

Wherever possible we have used the latest data and techniques available, taking care to highlight the associated challenges and consequent assumptions. Widespread disclosure of climate risks will, in and of itself, improve the availability of data and accelerate the development of new metrics and risk assessment methodologies. It is therefore important that organisations start to disclose their climate risks even where there are gaps in data and techniques. We learned a great deal from the work we did to prepare our first climate report in 2020, and have built on that experience to further improve the metrics and methodologies used in this report.

As with last year, we have engaged external data providers to support our analysis of the climate risks in our financial asset holdings in particular. Where techniques have developed since last year’s report, we have restated metrics in order to make use of improved methodologies while also being able to describe how the metrics have changed since the previous report. Box B sets out some of the main changes in methodologies and how some of the more innovative techniques used should be thought of at this stage as providing an approximation of the risks facing the Bank’s holdings, while estimation methods develop and become more robust. The Bank is actively involved in multiple domestic and international initiatives that aim to bridge current climate data gaps and increase standards and consistency of climate risk modelling.

Chapter 2: Governance

Climate risks touch all areas of the Bank, and as such it has been embedded across the Bank’s existing governance and risk functions. However, there are inherent idiosyncrasies in the nature of climate risks and our response to them, which mean that some climate-specific structures are still required. We set out below how climate-related governance is applied across the Bank.

Governing bodies

Figure 2.1: Organogram illustrating Bank committees and steering groups relevant to the governance of the Bank’s work on climate change ^{(a)(b)(c)(d)(e)(f)}

Footnotes

• Source: Bank of England.
• (a) The Bank’s Court of Directors (Court), while reserving certain key decisions to itself, has delegated to the Governor the day-to-day management of the Bank. The Governor delegates certain decisions to individuals or committees within the Bank, and takes advice on others. The principal forums for such advice are the Executive Committee (ExCo) and its sub-committees: Policy Co-ordination Committee (PCC), Executive Risk Committee (ERC) and Executive Operations Committee (EOC).
• (b) Joanna Place is Chief Operations Officer and Executive Committee Sponsor for climate change across the Bank of England’s internal operations.
• (c) Sarah Breeden is Executive Director of UK Deposit Takers Supervision and Executive Sponsor for climate change across the Bank of England’s policy functions.
• (d) Andrew Hauser is the Executive Director of Markets, the directorate responsible for leading the Bank of England’s market operations and analysis of the climate impact of the Bank of England’s financial asset portfolios.
• (e) The Audit and Risk Committee (ARCo) is a sub-committee of Court.
• (f) The Executive Directors’ Climate Steering Group (EDCSG) can make recommendations to, and review papers prior to going to, the ERC, EOC, PCC, ARCo, and other Bank committees where relevant. The EDCSG is not a formal Bank committee or decision-making body.

Our Court of Directors (Court), which acts as a unitary board, sets the Bank’s strategy and budget, and takes key decisions on resourcing and appointments. Court is responsible for matters that concern the Bank as an organisation, while policy responsibilities are reserved for policy committees. The Audit and Risk Committee, a sub-committee of Court, assists Court in its responsibility for maintaining effective risk management, internal controls and financial reporting. In line with these responsibilities, both Court and the Audit and Risk Committee discuss the Bank’s approach to climate risk management and disclosures. In April 2019, Court took the decision to publish a disclosure in line with the TCFD recommendations to promote transparency around the Bank’s exposure to, and management of, climate risks. At a minimum, Court reviews the Bank’s progress against climate-risk targets on an annual basis as part of its review of the Bank’s Annual Report.

Our Executive Committee is the most senior policy-making body beneath Court. The Executive Committee, and where relevant its sub-committees, have reviewed and approved our climate strategy.

The Bank’s three statutory policy committees are the Monetary Policy Committee (MPC), the Financial Policy Committee (FPC), and the Prudential Regulation Committee (PRC). The Chancellor of the Exchequer sets the remits and recommendations letters of the Bank’s policy committees. In March 2021, these were updated to include, among other things, the Government’s economic strategy for a ‘transition to an environmentally sustainable and resilient net-zero economy’. We set out the implications of these changes in the Strategy chapter of the report.

Executive sponsorship

The Bank voluntarily complies with the core principles of the Senior Managers Regime. In line with the Prudential Regulation Authority’s (PRA’s) supervisory expectation that banks and insurers assign a Senior Management Function (SMF) responsible for the financial risks from climate change, the Bank has allocated this responsibility to Sarah Breeden, Executive Sponsor for climate change and Executive Director of UK Deposit Takers Supervision. The Executive Sponsor and SMF holder is responsible for recommending the Bank’s climate change strategy to the Executive Committee, overseeing its execution, and co-ordinating climate-related work across the Bank. Alongside Sarah Breeden, the Bank has appointed Chief Operating Officer, Joanna Place, as Executive Committee Sponsor for climate change across the Bank’s internal operations.

As climate-related work has become embedded across the organisation, a new group, the Executive Directors’ Climate Steering Group, was established in 2020 to ensure effective co-ordination on climate-related work across the Bank. This group acts as a forum for Executive Directors to discuss climate-related issues and has been active in supporting Court and the Bank’s executive and policy committees in their work on climate change.

Chapter 3: Strategy

The Bank’s mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. Climate change is relevant to our mission as the physical effects of climate change (eg sea-level rises and more frequent severe weather events) and the transition to a net-zero economy (eg changes in government policy, consumer preferences, and technology) create financial risks and economic consequences. These risks and consequences can affect the safety and soundness of the firms we regulate, the stability of the wider financial system, and the economic outlook.^{footnote [6]} For these reasons the risks from climate change and the transition to a net-zero economy continue to be a strategic priority for the Bank.

The objective of the Bank’s work on climate change is to:

‘Play a leading role, through our policies and operations, in ensuring the financial system, the macroeconomy, and the Bank are resilient to the risks from climate change and supportive of the transition to a net-zero economy.’

We build this resilience and support the transition by ensuring that climate-related financial risks are proactively managed and pre-emptively mitigated through our policy functions (eg our supervision of banks and insurers) and the Bank’s management of its own operations (eg the carbon footprint of our buildings and corporate bond holdings).

This year we have updated our climate strategy to reflect the significant progress we and others have made to date, the recent changes to our policy committees’ remits, and the new opportunities presented by the UK’s presidency of the G7 and hosting of the UN COP26. We have articulated this climate strategy in playing our part across five key goals:

Managing risks in line with our remit

Climate risks have a direct impact on the delivery of the Bank’s core policy objectives and so have driven a range of policy actions to build resilience across the financial system. The importance of this work has been recognised by the Government in updates to the remits and recommendations of all three of the Bank’s policy committees. For example, noting that the Government’s economic strategy, which the committees have regard to, includes ‘structural reform…to transition to an environmentally sustainable and resilient net-zero economy’ and maintaining a ‘financial system that supports…the transition to a net-zero economy’. These updates reinforce the work we have undertaken to date and our forward work-plan, further details set out below:

Financial Policy Committee – In March 2020, the FPC’s remit and recommendations were updated to note that the FPC should ‘continue to regard the risks from climate change as relevant to its primary objective’, and that in the context of its secondary objective, the FPC ‘has a role to play in seeking to support the Government’s Green Finance Strategy…’. The Bank’s work on climate change has been consistent with these changes, including the development of the Climate Biennial Exploratory Scenario (CBES) exercise and the Bank’s contribution to the UK joint regulator and Government TCFD Taskforce on mandatory climate disclosure.

In March 2021, the FPC’s remit and recommendations were updated again to include the Government’s revised economic strategy. They also recommended that the FPC ‘consider the potential relevance of other environmental risks to its primary objective’. The financial risks that might arise from these wider environmental risks, such as biodiversity loss, are not currently well understood, and so the Bank will progress plans to explore them and consider the extent to which they may pose a threat to UK financial stability.^{footnote [7]}

Monetary Policy Committee – The MPC’s remit was updated in March 2021 to note the Government’s revised economic strategy. This is the first time that the MPC remit has specifically considered climate change. In response, the Bank intends to adjust the way it manages the Corporate Bond Purchase Scheme (CBPS) to take account of the climate impact of issuers of the corporate bonds it holds.^{footnote [8]}

Prudential Regulation Committee – The PRC’s recommendations were updated in March 2021 to include the Government’s revised economic strategy and note that the PRC should ‘have regard to the Government’s commitment to achieve a net-zero economy by 2050 under the Climate Change Act 2008 (Order 2019) when considering how to advance its objectives and discharge its functions’. Similar wording is used in the Financial Services Act 2021, which amends the Financial Services Markets Act 2000, with respect to the PRA’s rulemaking powers when implementing Basel standards and subsequent Capital Requirements Regulation (CRR) rules.^{footnote [9]} The PRA has for some time recognised the risks posed by climate change and the transition to a net-zero economy to the safety and soundness of the firms it regulates. Consequently, these changes to the PRC’s recommendations are consistent with the existing climate work plan of the PRA, including assessing firms against its supervisory expectations.

The Bank’s work against its strategic goals

(1) Ensuring the financial system is resilient to climate-related financial risks

The Bank is using its micro and macroprudential toolkits to build resilience to climate-related financial risks at both an individual firm and system-wide level.

In April 2019, the PRA became the first prudential regulator to publish a comprehensive set of supervisory expectations for how banks and insurers should enhance their approaches to managing the financial risks from climate change. These expectations are designed to ensure firms adopt a strategic approach to managing climate-related financial risks. In summary, the PRA expects firms to: embed climate risk into their governance framework; incorporate climate risk into existing risk management frameworks; undertake longer-term scenario analysis to inform strategy and risk assessment; and develop an appropriate approach to climate disclosure in line with the TCFD framework. We followed this up in July 2020 with a Dear CEO letter providing additional guidance for firms on meeting our expectations, giving industry feedback on progress to date, and setting a deadline for firms to embed fully our expectations by the end of 2021. The PRA’s supervisory focus for 2021 will be on monitoring and engaging with firms on their progress against the supervisory expectations in the lead up to the deadline at the end of the year.

Since the launch of its supervisory expectations, the PRA has actively engaged with financial firms to build a shared understanding of its expectations on climate change and support efforts by firms to develop their capabilities. Furthermore, in March 2019, the PRA and the Financial Conduct Authority (FCA) co-convened the Climate Financial Risk Forum (CFRF), an industry group established to share best practice on climate issues. In June 2020, the CFRF published a guide for the financial sector containing practical tools, information and case studies on climate risk management, scenario analysis, disclosure, and innovation. This work continues in 2021, with a focus on developing additional frameworks and tools for use by firms and includes a new workstream on climate data and metrics.

The PRA took similar steps to support general insurers’ ability to quantify the impact of physical risks. Working with a group of representatives from the general insurance sector, in May 2019 the PRA published a framework for assessing financial impacts of physical climate change. The paper provides an aid for practitioners to use to assess climate-related financial risks, using tools that are already available within the general insurance sector. The framework is designed as a starting point for firms to assess the physical risk impacts in the context of their business decisions and disclosure requirements. In 2020, the PRA considered the feedback provided and reflected on how to address it within the context of the Bank’s current and future climate workstreams. The Bank has issued a response summarising the main feedback points received and areas where further development is recommended.

Building on lessons learned from the climate exploratory exercise in the 2019 Insurance Stress Test, the Bank announced in December 2019 a framework for assessing the resilience of individual banks, insurers, and the wider UK financial system to three different climate scenarios through a Climate Biennial Exploratory Scenario exercise. These scenarios are based on those published by the international central banks and supervisors Network for Greening the Financial System (NGFS). The objectives of the CBES are to: (1) size the financial exposures of individual firms and the financial system to climate change; (2) understand how firms might respond to different climate scenarios and the impact on their business models; and (3) improve firms’ management of the financial risks from climate change. The benefits of the CBES exercise will go well beyond the results generated. In carrying out the exercise, firms will need to reach out to their counterparties, to understand better their climate risks and plans to address them. This should help prompt further disclosure and climate action by businesses across the real economy, as well as filling some critical climate data gaps. Firms may also use the design of the CBES and the underlying NGFS scenarios to inform their own scenario analysis, build their understanding of the climate risks they face, and enhance their climate risk management capabilities.

(2) Supporting an orderly economy-wide transition to net-zero emissions

The primary levers for driving an orderly economy-wide transition to net-zero emissions rest with government setting climate policy, industry driving innovation and climate action, private investors allocating capital and consumers making choices about their spending. But as highlighted in the recent changes to the policy committees’ remits, the Bank, through its policies and operations, can complement, catalyse and amplify as government develops and sets out its plans. Clarity over the transition paths for each sector will better allow the UK economy to adjust effectively, reducing the risks of a later, sharper, and more disorderly transition.

The Bank chairs the macrofinancial workstream of the NGFS which is leading the development of climate scenarios for central banks and policymakers. These scenarios assess the financial and economic impacts of different possible temperature pathways and climate policy actions consistent with those outcomes. They aim to set out what transition means in practice, providing a key tool to enable firms and policymakers to take practical steps today based on the risks they face from climate change under different climate scenarios. As such, the development of frameworks to undertake scenario analysis, and the development of the climate scenarios themselves, are central to the Bank’s strategy to support the transition. As noted previously, the Bank is also using these scenarios in its upcoming CBES exercise.

While effective climate risk management and scenario analysis should in and of itself support the transition, the Bank can also use its work to create conditions that help facilitate investment in the transition. For example, the Bank, alongside HM Treasury and the FCA, has convened an industry working group to facilitate investment in productive finance. While this work is currently sector-agnostic and considers a broad range of assets, unlocking financing for longer-term and less liquid assets could also benefit productive sustainable investment in areas such as green technologies and renewable energy infrastructure. The impact on sustainable investment will be kept under review as the working group progresses.

Looking ahead, the Bank will seek, where appropriate, to support effective standards, frameworks, and initiatives in areas such as climate data and green finance. Bridging climate data gaps, improving access to climate data sets, and establishing common climate data standards are critical to enabling effective reporting and disclosure. They also support the development of more advanced and useful climate metrics. The Bank is involved in several of these initiatives, for example we are part of the NGFS and FSB workstreams on climate data gaps, and are considering including climate data as a topic of interest in our work on data transformation in the financial sector. In addition, the Bank is supporting the work of HM Treasury and the department for Business, Energy and Industrial Strategy (BEIS) on the development of the UK green taxonomy.

(3) Promoting adoption of effective TCFD-aligned climate disclosure

We have supported the adoption of the disclosure framework established by the TCFD since its inception. The information in these disclosures needs to be consistent, comparable and comprehensive to be useful. Disclosure is important not only for transparency and for risk management purposes, but also as a way to enable the flow of capital towards investments that are consistent with an orderly economy-wide transition to net-zero emissions. Consequently, it is also integral to the UK’s legislative commitment to reach net-zero emissions by 2050.

On 9 November 2020, the UK joint regulator and government TCFD Taskforce, of which the Bank is a member, published an interim report and roadmap for mandatory TCFD-aligned disclosure requirements across the economy by 2025. These requirements are complemented by the PRA’s existing supervisory expectation that banks and insurers should report their climate-related financial risks as part of their public disclosures.

Climate risks are global and therefore the coherence and consistency of disclosure requirements and sustainability standards across jurisdictions is important for promoting effective risk management and supporting climate action. In light of this need, the Bank is supportive of multilateral work including the G20 and FSB exploring ways to promote globally comparable, high-quality and auditable standards of disclosure based on the TCFD recommendations, including the IFRS Foundation Trustees’ proposal to establish a Sustainability Standards Board (SSB) for the development of global sustainability reporting standards. We believe the focus of this work should initially be on the climate-related financial disclosures most relevant to investors and other market participants, building on the framework developed by the TCFD.

The Bank is also supportive of the development of forward-looking metrics which take into account the future emissions associated with companies’ activities. We are engaging with a number of international bodies, private sector and non-profit groups developing such metrics and associated frameworks. Looking ahead, we will play our part in rolling out the mandatory disclosure roadmap, progressing the development of metrics, and supporting the establishment of the IFRS SSB.

(4) Working towards a timely and co-ordinated international approach to climate change

The consequences of climate change, effectiveness of climate policy, and need for a robust understanding of climate risks, are not solely domestic concerns. They must therefore be delivered in a co-ordinated and timely fashion at an international level. The Bank can support this through its work with other central banks, through prominent roles in international fora, and by working with Government to deliver on its G7 and COP26 agendas. The Bank also provides training to other central banks and regulators on topics including climate-related financial regulation through the Bank’s Centre for Central Banking Studies.

The Bank is a founding member of the NGFS and sits on the steering committee. The NGFS was co-founded by eight central banks and supervisory authorities in December 2017. As of June 2021, membership has grown to 91 members and 14 observers representing countries responsible for around 85% of global greenhouse gas emissions and 88% of global GDP. Through the NGFS the Bank aims to share its own experience, learn from others, and promote consistent and effective responses to climate risks by central banks and supervisors across the world.

The Bank also co-founded the Sustainable Insurance Forum (SIF) to advance supervisory responses to climate change in the insurance sector across the globe. SIF is a global network of insurance supervisors and regulators working together on sustainability challenges facing the insurance sector, including climate change. In 2020, the SIF published a climate-related question bank for insurance supervisors and, alongside the International Association of Insurance Supervisors (IAIS), published a landmark draft paper on the supervision of climate risks in the insurance sector. Anna Sweeney, Executive Director of Insurance Supervision at the Bank, is the chair of the SIF and Vicky Saporta, Executive Director of Prudential Policy at the Bank, is chair of the IAIS.

In addition to these climate-focused fora, the Bank is also actively engaged in the climate-related workstreams of standard setters and international bodies. For example, the Bank is actively contributing to the climate-related work of the Basel Committee on Banking Supervision (BCBS)^{footnote [10]} and the FSB.

The G7, the G20 and COP26 provide an opportunity to make progress on key climate-related financial sector issues internationally. Under the UK presidency, the G7 has started meaningful discussions on the role of finance ministries and central banks in the transition to net zero, including how climate policies can help mobilise private finance to support the transition. The Bank is also actively involved in the G20, both through the work of the FSB on disclosures and regulatory approaches to climate risks, and the Sustainable Finance Working Group, through its development of a climate-focused G20 sustainable finance roadmap. In addition, the Bank is supporting the work of the COP26 Private Finance Agenda in the lead up to the COP26 conference. Looking ahead, the Bank will continue to play an active role in international fora to push for addressing climate risks at a global level.

(5) Demonstrating best practice through our own operations

The Bank holds itself to the same high standards that it holds the firms it regulates and the financial system it oversees. As such, the Bank will ensure its own operations conform to best practice in the measurement, management and mitigation of climate risks. This includes emissions from both our physical activities (such as our buildings, production of banknotes, and travel) and our financial market operations. The Bank has considered how its approach to its own operations, where relevant, compares to the supervisory expectations it has set for PRA-regulated banks and insurers.

In relation to our physical operations, we are on track to meet our ambitious 2030 carbon target to reduce the Bank’s greenhouse gas emissions by 63% from 2016 to 2030, covering Scope 1 emissions (use of natural gas, fuel and refrigerants), Scope 2 emissions (electricity) and travel emissions (which are classified as Scope 3). This target is externally verified, informed by the Science Based Target (SBT) methodology and is consistent with reductions needed to ensure our emissions from these activities are aligned with Paris goals. The Bank has gone further this year and made a commitment to achieve net-zero greenhouse gas emissions from its physical operations by 2050 at the latest. Further details on emissions from our physical operations are set out in Chapter 4.

For our financial operations, as previously noted, the Bank intends to adjust its approach to purchasing corporate bonds in the CBPS, a financial asset portfolio held for monetary policy purposes, to take into account the climate impact of issuers. In addition, the Bank’s pension trustees’ have committed to have regard to climate risks when making future investments, and the fund will publish its own TCFD-aligned disclosure from 2022.

Chapter 4: Risk management, metrics and targets

Risk management

The Bank has a risk management framework that spans all of the Bank’s functions, and includes climate risks. This framework sets out how risks (including those related to climate change) are identified, assessed, managed, monitored and reported. It is underpinned by a Risk Taxonomy, an internal classification of risk types, which all areas of the Bank use to categorise their risks. Metrics of the type shown in this report are reported regularly to the Bank’s risk committees.

Each risk type has an Executive Sponsor, who, supported by the Bank’s second line risk function, is responsible for: defining the set of risk metrics and tolerances; monitoring and reporting them; and, where appropriate, co-ordinating the timing and implementation of mitigants.^{footnote [11]} Development of the climate metrics drew on expertise across the Bank, aiming to capture the full range of climate risks to which the Bank is exposed. The metrics reported will be refreshed periodically, reflecting the pace of development in the field and frequency of reporting of underlying data.

We use the risk framework to monitor exposure to climate change and how it could impact the resilience of our financial and physical operations. To help us analyse climate risk in both these areas, we focus on two transition channels:

• Transition risks arise from the adjustment towards a net-zero economy, which will require significant structural changes to the economy. Changes in policy, technology and shifting consumer preferences and interpretations of the law could prompt a reassessment of the value of a large range of assets. In turn, this will give rise to credit risk for lenders and market risk for insurers and investors. The resultant risks would be more pronounced in the case of a sudden adjustment and could, dependent on scale, be a source of financial instability.
• Physical risks arise from changes in the long-term climate and the increasing severity and frequency of weather events. Physical risks can damage property and other infrastructure, disrupt business supply chains, impact human working conditions and health and, more broadly, can lead to internal displacement and conflict. This reduces asset values, results in lower profitability for companies, damages public finances, and increases the cost of settling underwriting losses for insurers. Indirect effects on the macroeconomic environment, such as lower output and productivity, exacerbate these direct impacts.

Our approach to risk management is influenced by three distinct characteristics, which we see in both transition and physical climate risk, and which mean that addressing climate risks presents unique challenges:

• The impact is far-reaching in breadth and magnitude: climate change risks will affect all parts of the economy, across all sectors and geographies. The risks will be correlated and their impact nonlinear and irreversible.
• The risks are foreseeable: while the exact outcome is uncertain, some combination of transition and physical risks will crystallise.
• The magnitude of the future impact is dependent on actions today: this includes actions by governments, central banks and regulators, businesses and households, and financial firms.

While these three characteristics mean that climate risks present unique measurement and management challenges, the Bank’s approach has prioritised development of the necessary capabilities, recognising that delay will impair our ability to both measure the risks we are taking in the short term and assess the long-term consequences of those decisions. In particular, the Bank takes a forward-looking approach to climate risk management.

The process for managing these risks will continue to develop as our understanding of underlying risks improves, technical capabilities evolve, and methodologies develop and become more standardised.

The remainder of this chapter sets out the key climate risks the Bank has identified to its financial and physical operations:

Key climate-related risks to the Bank’s financial operations

The Bank engages in a range of market operations for the purposes of implementing monetary and financial stability policy and to fund its wider activities (Figure 4.1). This involves purchasing sovereign and corporate assets, and secured lending to counterparties through our facilities. As part of managing the financial risks involved in this, we conduct credit risk assessments and manage a wide range of collateral.

Figure 4.1: Our policy and balance sheet tools ^(a)

Footnotes

• Source: Bank of England.
• (a) This diagram excludes the Alternative Liquidity Facility as there are currently no exposures. The Covid Corporate Financing Facility (CCFF) is also not included here as it is a short-term facility that closed to new purchases on 23 March 2021.

We have taken a number of steps to incorporate climate risks into our risk management processes. As set out in last year’s report, we have prioritised enhanced information gathering to improve our ability to identify the nature and size of the potential climate risks affecting our exposures. Initially, this new climate information is being incorporated into our assessment frameworks through qualitative analysis. This enhanced information gathering will then allow us to develop our financial risk frameworks further. Our approaches will remain under review as data and methodologies in this area develop (Figure 4.2).

Figure 4.2: Iterative risk management enhancements across the Bank’s financial operations

Footnotes

• Source: Bank of England.

For our direct exposures, the work undertaken as part of this disclosure report provides an extensive source of data and insight and is a crucial step in incorporating climate risk into our financial risk management. It provides an analysis of the climate emissions, transition and physical risks facing the Bank’s financial asset holdings, and for the first time this year includes analysis that attempts to translate those into measures of financial risk (see below section ‘The Bank’s financial asset portfolios’). We are using this in our financial risk management framework for sovereigns, currently as a qualitative overlay, as set out above, while metrics which aim to translate these risk exposures into estimates of financial risk are being further developed. For corporates, we will be drawing on these analyses in parallel to the work being done on greening the CBPS (Box D).

For our counterparty exposures, we are also developing an approach to incorporate climate risks into our assessments, though this is at an earlier stage. For our collateral holdings, since 2019 the Bank has collected climate-related information in its due diligence questionnaires, covering how lenders are adapting their strategies, risk management frameworks and valuation methods to account for climate risks across the asset classes that are prepositioned with us. We are using that, other publicly available climate datasets and research on the impact of climate change on loan types to refine additional data requests and our approach.

We will explore the extent to which the results from the CBES – due to be received in 2021 Q4 – can inform our climate risk approach. And we will continue to deepen the range of forward-looking scenario-based analyses that we carry out on our own balance sheet, such as the modelling of transition and physical risk set out in Boxes E and F of this report.

The Bank’s financial asset portfolios

The Bank, working with external data providers, has updated the analysis presented last year to assess the risks from climate change to the Bank’s financial asset holdings. This analysis is based on financial asset holdings as at end-February 2021, to align with the Bank’s Annual Report and Accounts.^{footnote [12]} Although data on the Bank’s financial assets are up to date, most of the climate data used in this report are only available with a time lag – indeed the analysis here is based primarily on emissions data from 2019 or earlier and so does not reflect the large but temporary economy-wide reduction in emissions associated with Covid lockdown restrictions in 2020 (Box A).

Introduction and description of the portfolios

The Bank holds financial assets either to implement the Bank’s policy decisions or to fund its wider activities (Table 4.A).

The Bank’s response to the Covid crisis has significantly expanded the size of its financial asset holdings compared to last year’s report, from £532 billion in February 2020 to £807 billion in February 2021.^{footnote [15]} However, the composition of the holdings remains broadly similar to last year. By far the largest proportion of these assets (97%) continues to be held in a separate legal vehicle known as the Bank of England Asset Purchase Facility Fund, indemnified by HM Treasury, to implement the MPC’s asset purchase programme. In turn, 98% of that portfolio is in sterling UK government bonds (gilts) and the other 2% is invested in sterling corporate bonds.

The rest of this section is arranged in two parts: the first covering the Bank’s sovereign asset holdings, and the second covering its corporate bond holdings. For each part, we report measures of: the carbon footprint of the holdings; estimates of transition risk; and estimates of physical risk.

The metrics in this section draw both on published data and data and methodologies from external data providers which the Bank has used. Data for climate risk analysis are evolving rapidly, and as a result some of the metrics used here are still in the early stages of development and should therefore be seen as illustrative only when applied to the Bank’s holdings. Data and methodology-based considerations are discussed in more detail in Box B.

Sovereign asset holdings

Carbon footprint

Carbon footprint metrics provide an assessment of the GHG emissions associated with a given investment portfolio. These metrics provide a current view of the environmental impact of the investments in any given portfolio which, when combined with other data, may also help indicate how investments may be affected by future climate risks.

The preferred metric for assessing the carbon footprint of an investment portfolio, as currently recommended by TCFD, is the Weighted Average Carbon Intensity (WACI). This calculates the average carbon intensity of a portfolio (GHG emissions measured relative to GDP), weighted by the relative size of the investments in that portfolio. This metric is useful as it allows for comparisons between similar types of assets and portfolios, regardless of investment size. The data used here measure emissions on a ‘production basis’: ie emissions from all goods and services produced within a country’s territorial boundary and consumed anywhere in the world.

This year we have used data from the UNFCCC^{footnote [17]} and the World Bank, and have also presented the WACI metrics from last year’s report using this dataset for comparison.

Chart 4.1: WACI of the Bank’s sovereign holdings ^(a)(b)(c)(d)

Footnotes

• Sources: Bloomberg Finance L.P. data for market value of debt outstanding for G7 countries, UNFCCC GHG emissions data (2017 and 2018), World Bank GDP $ PPP (2017 constant prices, for 2017 and 2018) and Bank calculations.
• (a) Due to the lag in reporting of national carbon emissions, the emissions data for the 2020 and 2021 portfolios are from 2017 and 2018 respectively.
• (b) For reference, the reported WACI of the APF Sovereign, Pension Fund and own securities holdings in last year’s report were 202, 202, and 227 tCO₂e/£m GDP respectively, using a different dataset (S&P Trucost).
• (c) For the purposes of this assessment, supranational and government-guaranteed issuers are assigned the same risk scores as the countries in which they are situated.
• (d) The G7 reference portfolio is calculated by weighting G7 countries according to the market value of debt outstanding at year end (end-Feb 2020 and end-Feb 2021). Market value of debt data are from Bloomberg Finance L.P.

The WACI of the Bank’s sovereign holdings has fallen slightly compared with a year ago, and remains materially lower than that of a comparable G7 reference portfolio, reflecting the UK’s favourable relative emissions performance. The sovereign holdings in the APF and Pension Fund are comprised entirely of gilts, and so the WACIs of both are the same as that of the UK sovereign – at 222 tonnes of CO₂ equivalents per £ million GDP (tCO₂e/£m GDP). The WACI of the Bank’s own securities holdings is slightly higher (at 261 tCO₂e/£m GDP), reflecting that approximately 20% is invested in the debt of sovereigns with a higher carbon footprint than the UK.

Transition risk

In order to achieve national and international climate goals over the coming decades, countries and companies around the world need to undertake unprecedented structural changes to reduce global GHG emissions at a significantly faster rate than is occurring today. These substantial changes to business models and economic conditions will result in so-called ‘transition risks’ to sovereign and corporate assets – as changes in policy, technology and sentiment prompt a reassessment of asset values.

One aspect in monitoring transition risk exposure in sovereign holdings is to look at sovereigns’ fossil fuel exposures. If all proven fossil fuel reserves were to be consumed, the global emissions generated would far exceed the levels required to achieve the Paris Agreement. There is therefore an increasing likelihood that at least some fossil fuel-related assets could become ‘stranded’ (ie remain unexploited) as their economic value falls.

One method that can be used to assess the stranded asset risk of countries is to estimate the proportion of GDP accounted for by activities relating to extraction and production of natural resources. Using this approach, it appears that the Bank faces limited direct stranded asset risks to its sovereign holdings. According to the World Bank, total ‘natural resource rents’ (the profit from extracting natural resources) account for 0.7% of GDP for the developed market sovereigns held in the Bank’s own securities holdings, measured on a weighted average basis. Of that, less than 0.05% is contributed by coal rents. Taking the UK on its own (the most relevant comparator for the APF Sovereign and Pension Fund holdings) total natural resource rents are also 0.7% of GDP, primarily reflecting the remaining North Sea oil reserves. Of that, less than 0.002% is from coal.

Another relevant consideration when assessing the climate risk of sovereign assets is to assess countries’ forward-looking climate policies. If a country’s policies are not sufficiently aligned with international climate targets then it may be more exposed to risks associated with disorderly transition, which could have an impact on the values of its sovereign bonds at some horizon. Box C outlines how the UK interprets the international goals of the Paris Agreement, and how climate scenarios can be used to estimate potential risks if policies are implemented at different time horizons from those intended, or some are not implemented at all.

Chart 4.2 plots consensus scientific estimates of global emissions pathways^{footnote [18]} consistent with the Paris Agreement – the pink and blue lines in the chart. It then compares these to emissions expected if the climate policies planned by the sovereign issuers in the Bank’s own securities holdings are enacted – represented by the green range in the chart. ‘Planned policies’ refers to policies that have either already been implemented, or have been announced and not yet implemented but will have an impact over the time horizon in the chart when in place.^{footnote [19]} Looking backwards in time, the chart shows significant variations in sovereigns’ emissions over the period for which historic data are available (2010–18), with some achieving reductions in line with the Paris 1.5°C scenario and others increasing their emissions. There clearly is uncertainty around the forward-looking projections. Nonetheless, the chart suggests that none of the sovereign issuers in the Bank’s own securities holdings yet have sufficient policies planned to achieve the long-term 1.5°C ambitions of the Paris Agreement. How countries respond to this challenge will affect transition risk in the Bank’s holdings.

Chart 4.2: Historic and future emissions paths of sovereigns in the Bank’s own securities holdings ^(a)(b)

Footnotes

• Sources: Climate Action Tracker (CAT) [Data Portal] © 2009-2021 by Climate Analytics and NewClimate Institute, accessed Feb 2021, all rights reserved, IPCC Special Report: Global Warming of 1.5°C and Bank calculations.
• (a) The analysis does not extend beyond 2030 because that is the assessment horizon of the CAT projections underpinning the chart.
• (b) Planned policies here refers either to policies that have already been implemented, or have been announced and not yet implemented but will have an impact over the time horizon in the chart when in place.

Physical risk

The financial costs of physical climate change have also risen, and are projected to increase substantially further over coming decades. The manifestation of these risks and how they could evolve over time varies significantly by geography, and so the development of appropriate physical risk monitoring tools is essential for financial risk management. But the assessment of physical climate risks remains a significant technical challenge, requiring (among other things) detailed geographical data on asset locations to determine the severity of potential weather events in different locations.

The estimates of physical risk exposures in the Bank’s sovereign holdings presented here use a ‘scorecard’ approach developed by one of the external data providers that the Bank has used.^{footnote [20]} A range of indicators are used to score each country’s current and expected future physical risk exposures (as a proportion of GDP, population and agricultural land use) from zero to 100, where zero indicates ‘lowest risk’ and 100 indicates ‘highest risk’. The rankings give one perspective as to which sovereign financial assets may be the most exposed either to an increase in extreme weather events, or to chronic shifts in weather patterns.

The methodology used to do this scoring has been updated since that used in last year’s report. The scores now represent a percentile ranking – eg a score of 25 now means that 25% of the other countries assessed by the data provider have lower scores across each event type. This helps provides a more direct measure of relative physical risk exposures across sovereign holdings. More granular location data on flooding have also been incorporated into the scores for flood risk and sea- level rise – which is important given that these were the most important physical risk categories for our sovereign holdings last year.

These changes in methodology mean that the scores in this year’s report are not directly comparable to those in last year’s report. But again, we have recalculated the scores from last year using the revised methodology, in order to show how risks have evolved over the year, holding the methodology constant.

Using this improved methodology, the physical risk exposure in the Bank’s sovereign asset holdings remain relatively low overall – in the 9th to 16th percentile relative to the universe of sovereign scores assessed by the external data provider (Chart 4.3). Restated total scores using this methodology for last year lay between the 9th and 17th percentile.

Behind this overall position, sea-level rise (55th percentile) and flood risk (32nd percentile) pose the most material physical risks – again similar to the restated position last year (52nd and 33rd respectively). As was the case last year, the presence of some non-UK assets in the Bank’s own securities holdings poses marginally greater risks to the Bank from non-UK weather patterns such as hurricanes and heat stress. However, risks from these more extreme weather events remain much lower than in the G7 reference portfolio.

Chart 4.3: Physical risks facing the Bank’s sovereign asset holdings ^(a)(b)(c)

Footnotes

• Sources: Bloomberg Finance L.P., Four Twenty Seven and Bank calculations.
• (a) This year’s scores are not comparable with the scores presented last year, due to updates to the providers’ methodologies.
• (b) For the purposes of this assessment, government-guaranteed issuers are assigned the same risk scores as the countries in which they are situated.
• (c) The G7 reference portfolio is calculated by weighting G7 countries according to the market value of debt outstanding at year-end (end-Feb. 2020 and end-Feb. 2021). Market value of debt data are from Bloomberg Finance L.P.

Sterling corporate holdings

The rest of this section sets out the metrics used to assess the climate risks facing the Bank’s corporate holdings. As outlined above, the investments in the CBPS account for 2% of the Bank’s overall APF holdings, and are held for monetary policy purposes.

The CBPS was launched by the Bank’s MPC in 2016, and was designed to lower the borrowing costs and support bond issuance of firms that make a material contribution to the UK economy (eg companies with significant employment or headquarters in the United Kingdom). Financial sector companies regulated by the Bank or the FCA are not eligible.

An important part of the original design of the CBPS was to achieve the aim of imparting monetary stimulus in a way judged to be ‘sector neutral’ in the sense that CBPS investments should not create distortions in the relative borrowing costs faced by companies in different sectors. This is currently done by investing in sectors in proportion to the total outstanding eligible issuance accounted for by each sector within the sterling investment grade corporate bond market.

Following the March 2021 update to the MPC’s remit, the Bank announced that it would set out a new approach to its corporate asset purchases ahead of its planned reinvestment round later this year. A discussion paper on how this might be done was published in May and Box D summarises the key messages of that paper.

Carbon footprint

Corporate GHG emissions are commonly reported under three ‘Scopes’ as defined by the GHG Protocol^{footnote [21]} (Figure 4.3). Under this framework, ‘Scope 1’ represents a corporate’s direct emissions; ‘Scope 2’ refers to the emissions associated with purchased and consumed energy by that corporate; and ‘Scope 3’ includes all other indirect emissions associated with the production and consumption of a firm’s products.

Figure 4.3: The three scopes of GHG emissions reporting

Footnotes

• Sources: Bank of England and GHG Protocol.

In this report, the carbon footprint metrics associated with the Bank’s corporate holdings focus primarily on Scope 1 and 2 emissions. In some sectors, the largest component of a company’s carbon footprint may in fact come from Scope 3 emissions. However, when looking at portfolio level statistics there is a risk of double counting when Scope 3 is included (as one company’s Scope 3 emissions may well be others’ Scope 1 or 2). In addition, the lower reporting and availability of corporate Scope 3 data mean they are not yet widely used in portfolio reporting.

For corporates, WACI metrics are based on emissions relative to revenue, as compared to emissions relative to GDP for sovereigns. As outlined in Box B, compared to last year’s report, a greater proportion of corporate emissions data are now reported and so it is possible to calculate the WACI of the CBPS holdings using fewer modelled data (we now have disclosed emissions data for approximately 83% of the portfolio, up from 74% last year). In order to look at how the WACI metric has changed year on year, we have therefore restated the WACI from last year’s report using this wider coverage of reported emissions data.

Based on the latest available emissions data for 2019 (see Box A), the carbon footprint of the CBPS has fallen by 9% year on year and remains broadly representative of the sterling investment grade corporate bond market (Chart 4.4). This fall mainly reflects broad decarbonisation across the economy, but a part of it is also a result of the increase in the availability of reported data. The consistency with the WACI of the sterling investment corporate bond market is a result of the portfolio's current investment design, as set out above. The CBPS holdings WACI is 251 tonnes of CO₂ equivalents per £ million of revenue (tCO₂e/£m revenue), compared with 276 tCO₂e/£m revenue for the previous year and 247 tCO₂e/£m revenue for the current eligible universe of assets.

Chart 4.4: WACI of the CBPS over time, compared with a reference portfolio ^(a)(b)(c)

Footnotes

• Sources: Certain information ©2021 MSCI ESG Research LLC, reproduced by permission, companies’ annual filings and Bank calculations.
• (a) Last year’s portfolio WACI has been restated from the previously published figure of 294 tCO₂e/£m to account for improvements in data quality (ie moving from modelled estimates for emissions to companies’ disclosed emissions).
• (b) For MSCI data used throughout this report: Although the Bank of England’s information providers, including without limitations, MSCI ESG Research LLC and its affiliates (the ‘ESG Parties’), obtain information (the ‘Information’) from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness, of any data herein and expressly disclaim all express or implied warranties, including those of merchantability and fitness for a particular purpose. The Information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for, or a component of, any financial instruments or products or indices. Further, none of the Information can in and of itself be used to determine which securities to buy or sell or when to buy or sell them. None of the Information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
• (c) The ‘Eligible universe reference portfolio’ represents eligible assets as at the respective portfolio dates, weighted by nominal debt outstanding.

Beneath this aggregate metric, there continues to be significant sectoral variation in the carbon intensity of the CBPS (Chart 4.5). The utility sector (electricity, water and gas networks) and energy sector (firms involved in the extraction and production of natural resources such as oil and gas) are notably more emissions-intensive than other sectors, given the nature of their activities. Yet Chart 4.5 also shows that these emissions-intensive sectors reported improvements in their year-on-year WACI, albeit with variations at issuer-level. Across different firms this may reflect improvements in the efficiency of operational processes or increases in renewable energy capacity. Note that last year’s report presented the contribution of each sector to the overall WACI of the holdings. This year we instead present the WACI for each sector in the holdings, to provide a clearer illustration of each sector’s year-on-year performance.

Chart 4.5: Weighted average sectoral carbon intensities for the CBPS portfolio in 2021 and 2020

Footnotes

• Sources: Certain information ©2021 MSCI ESG Research LLC, reproduced by permission, and Bank calculations.

Forward-looking emissions performance against climate goals

As discussed above, material economy-wide changes will be required to reduce GHG emissions in line with long-term climate goals. Companies will need to consider how their business models will need to change as the economy transitions. As with the sovereign analysis, forward-looking measures of climate performance are therefore a vital complement to current carbon footprint metrics when assessing risks to corporate asset holdings. Such approaches are however inevitably subject to significant levels of uncertainty, and are highly sensitive to underlying assumptions and methodologies.^{footnote [22]}

Implied Temperature Rise (ITR) metrics provide one means of taking a forward-looking approach to climate risk analysis. These measures aim to assess the implied temperature trajectory of a portfolio so it can be compared with international climate goals. The Bank’s 2020 climate risk disclosure included an illustrative metric of this kind that estimated that the CBPS portfolio was aligned with 3.5°C degrees of warming by the end of the century.^{footnote [23]} But variations around that methodology produced alternative estimates ranging from <1.75°C to 4°C.^{footnote [24]} Ranges of this size complicate the use of such metrics for operational decision making.

Methodologies for these types of measures are, however, improving. The provider that calculated the 3.5°C estimate has significantly refined their methodology since last year. For example, compared to last year’s report, the metric now explicitly incorporates companies’ disclosed emissions reductions targets when estimating forward-looking climate performance, where these had previously been based on a modelled extrapolation of emission reductions according to a company’s current emissions and estimates of its green activities. The metric also includes enhanced estimates of the impact of emissions reductions from low-carbon technology. In addition, last year’s metric estimated companies’ ‘warming’ using only Scope 1 emissions, whereas Scope 2 and Scope 3 emissions are now also included. This is in line with emerging guidance for portfolio alignment metrics as it helps to prevent underestimation of warming, in particular for companies whose Scope 2 and 3 emissions are a greater proportion of the total. It may also help to incentivise companies to consider how to address emissions in their supply chains. But further work will be needed to address data quality and double counting issues.^{footnote [25]}

Using the new methodology, the CBPS portfolio’s implied temperature alignment is estimated to be 3.0°C. This means that if the projected emissions performance of the CBPS holdings were representative of the emissions performance of corporates globally, and decarbonisation efforts were not increased further, the world would experience 3.0°C of warming by the end of the century. Although that is lower than the 3.5°C shown in last year’s report,^{footnote [26]} the decline entirely reflects the improvements in methodological approach (rather than any year-on-year reduction)^{footnote [27]} – and remains significantly above the degrees of warming required to meet the goals of the Paris Agreement.

The Bank supports the continued development of forward-looking warming metrics, which provide a highly intuitive indication of the degree of alignment of portfolios. They do however require a large number of assumptions, in particular about the nature and credibility of constituent firms’ future emissions paths, and can be sensitive to small changes in these assumptions. In parallel to this ongoing support, we and others are therefore also exploring simpler and more transparent approaches to provide comparisons. One such approach is to look directly at corporates’ decarbonisation plans, rather than incorporating them into warming metrics.

One way to assess the extent to which those plans will lead to sufficient economy-wide reductions in emissions is to compare how far they align with the UK’s 2050 net-zero target, and Chart 4.6 is an attempt to do this. The pink line shows the carbon intensity pathway estimated by the Committee on Climate Change (CCC) to be required over the next 10 years in order for the economy to be on track to meet the UK’s net-zero target by 2050.^{footnote [28]} The green swathe shows the range of carbon intensity targets published by corporates accounting for 45% of the bonds held in the CBPS, translated by one of the data providers into carbon intensity schedules out to 2030. And the blue line shows the average carbon intensity target of those firms.

On the face of it, Chart 4.6 shows that while some of the firms in the sample have set themselves targets that put them on track to meet, or even beat, the UK’s net-zero targets, on average that is not the case for the sample as a whole. Unless these targets become more ambitious over time, that could pose risks to the Bank’s holdings in the CBPS. There are however some important caveats to this approach. First, it doesn’t reflect that corporates in different sectors of the economy will need to follow different decarbonisation pathways – so comparisons to the UK economy-wide net-zero pathway are less useful than to sector pathways. For that reason, development of robust sector pathways is a crucial priority. Second, this chart only covers 45% of our CBPS holdings, reflecting data availability currently from providers. And third, this is inevitably a snapshot and does not incorporate plans firms may have to increase their ambition over time. All that said, this kind of analysis provides another type of forward-looking metric and the Bank will continue to work with multilateral organisations to develop best practice in this area.

Chart 4.6: The range of decarbonisation plans for a subset of corporates in the APF portfolio ^(a)(b)(c)

Footnotes

• Sources: The CCC’s Sixth Carbon Budget, Certain information ©2021 MSCI ESG Research LLC, reproduced by permission, and Bank calculations.
• (a) This chart only covers companies with targets recorded by MSCI ESG Research, which account for only 45% of assets in the CBPS portfolio. The analysis includes all three scopes of emissions, each assigned a weighting by their relative importance according to the sector they are in.
• (b) The emissions reductions plans presented in this chart have been translated by MSCI into carbon intensity schedules out to 2030 so they can be compared on a like-for-like basis.
• (c) The UK’s net-zero pathway is based on the balanced net-zero pathways from the UK’s sixth carbon budget.

Box D: Greening the CBPS update

The investments in the APF corporate portfolio are held for policy purposes and directly reflect the design of the CBPS when it was launched by the MPC in 2016.

The CBPS was introduced to lower the borrowing costs and support bond issuance of firms that make a material contribution to the UK economy – eg companies with significant employment, or headquarters, in the United Kingdom. Financial sector companies regulated by the Bank or the FCA are not eligible; these typically have low direct emissions in any case.

As set out in Chapter 3, on 3 March 2021 the MPC’s remit was updated to clarify that its secondary objective, of supporting the Government’s economic strategy, now includes maintaining ‘a financial system that supports…the transition to a net-zero economy’. In response, the Bank announced that it would adjust the design of the CBPS to account for this new objective, with a view to implementing that approach in its next scheduled round of reinvestments. The Bank published a discussion paper in May. This set out the principles for our approach and the tools which we intend to use to implement these (Figure 4.4), and sought input from stakeholders.

Figure 4.4: The Bank’s approach to greening the CBPS

Footnotes

• Source: Bank of England.

Transition risk

Firms that have business models reliant on the extraction and combustion of fossil fuels are likely, other things equal, to be more at risk as the economy transitions. Data providers can help estimate the proportion of corporates’ revenues directly attributable to fossil fuel-related activity, as one measure of stranded asset risk.

In aggregate, the CBPS holdings face limited stranded asset risk from direct exposures to fossil fuel extraction and combustion. Some 0.9% of total corporate revenues for companies represented in our holdings are derived from fossil fuel power generation, the majority of which are from natural gas – and a further 0.6% is estimated to be derived specifically from oil and gas extraction and production. A much broader measure including revenues also related to refining and distribution gives estimates of up to 11.6%.^{footnote [29]} These numbers are not directly comparable to those quoted in last year’s report, due to changes in data sources and a subsequent increase in portfolio coverage. However, the updated metrics do not materially change the assessment of the risks facing our portfolio.

It is important to consider transition risks from a broader set of sources than stranded asset risk alone. Chart 4.7 considers the relative proportions of current CBPS holdings falling into particular transition risk categories, as defined by MSCI’s Low Carbon Transition Management Scores – another new inclusion compared to last year’s report. These scores consider factors such as a firm’s strategy and governance, current climate performance, and initiatives, programmes and targets in place to improve climate performance over time. Using these factors, firms are placed into one of five buckets, which represent a ranking from highest to lowest risk category: asset stranding, product transition, operational transition, neutral (ie companies facing limited direct exposure to transition risk) and solutions (Chart 4.7). Each square in the chart represents 1% of the portfolio by value.

According to this methodology, 64% of the portfolio is currently assessed as ‘neutral’, meaning it faces limited direct exposure to transition risk. A further 4% is classified as actively providing solutions to combat climate change. And none of the corporates in the CBPS holdings currently fall within the highest stranded asset risk category – in line with the assessment that these corporates have limited revenue reliance on direct fossil fuel activities. However, 32% of the portfolio falls within the ‘product’ or ‘operational’ transition risk categories, indicating that these firms will need to adapt their business models substantially to align with climate goals. Such adjustments may involve taking on additional business and financial risk, which may impact the riskiness of those issuers’ bonds. This result is qualitatively similar to that shown in Chart 4.6.

Chart 4.7: Relative exposures to climate transition risk in the CBPS portfolio

Footnotes

• Sources: Certain information ©2021 MSCI ESG Research LLC, reproduced by permission, and Bank calculations. Based on portfolio coverage of 91%.

Chart 4.7 gives a point in time assessment, similar to an assessment of current carbon emissions, and does not assess readiness against a particular transition scenario. It also doesn’t provide an indication of the financial materiality of those risks. Transition risk extends well beyond traditional planning, forecasting and rating horizons and will entail substantial shifts in policies outside of companies’ direct control and consumer demand. The range of potential transition pathways the economy may take is both wide and highly uncertain and different companies will be subject to different levels of risk depending on how their strategies and financial policies evolve in the future.

Emerging best practice in climate-related risk management is therefore to consider what could happen under a range of plausible future scenarios. To support the development of such approaches, an initial stylised attempt at this type of scenario analysis is presented in Box E. Unsurprisingly, this analysis suggests that transition risk will be higher under a scenario where policy action is taken later and requiring steeper action, and that companies in the energy sector would be the most at risk in that case.

Box E: Modelling the financial impacts of transition risk: scenario analysis

One of the key transition risks for firms globally stems from future ‘policy costs’ they may face if economies are to decarbonise in line with climate goals. Such policy costs may arise, for example, if countries decide to drive transition, at least in part, through the adoption of more stringent ‘carbon taxes’ on emissions.

The time horizons for such risks are highly uncertain and much longer than those considered by most traditional financial portfolio planning models. The approach described below, developed by MSCI,^{footnote [30]} considers what could happen to corporate valuations if potential future policy costs were fully priced in by investors today. The time horizon used here is to consider costs that might occur between now and 2100, to align with the full period reflected in the Paris Agreement. This is an extreme assumption in order to give a full estimate of costs. In reality, market prices are only likely to adjust by anything approaching the full amount as policy pathways become clearer.

The valuation results in this box relate most closely to equity holdings, which the Bank does not have. To assess their impact for the pricing of corporate bonds such as those held in the CBPS, it would be necessary to translate these valuation impacts into estimates of probability of default (PD).

More broadly, the results should be considered as purely illustrative, given the number of strong assumptions required in addition to the choice of scenario horizon. For instance, the potential policy costs firms could face are calculated by looking at the emissions reductions they may be required to undertake, and the cost of reducing those emissions, under these scenarios. These estimates ignore both the offsetting impacts that firms could take, such as proactive management actions, and the targets that they may already have set to reduce their emissions. It is important to recognise too that transition will also bring significant commercial opportunities for some sectors and firms. To go some way to taking this into account, estimated policy costs are offset against estimates of the future financial benefits some may gain from investing in climate solutions – derived by looking at current revenues from green activities and filed patents in green technologies.

This approach uses two scenario types that are consistent with those currently published by the NGFS and with the approach being used in the Bank’s forthcoming climate-scenario exercise: ‘early policy action’, which represents a gradual and moderate global transition where the temperature stays below 2°C as a result; and ‘late policy action’, where global transition is delayed until 2030 and a more sudden and substantial response is required to still achieve countries’ climate goals. The specific scenarios and parameters are derived from a widely referenced climate model, which has then been adjusted by MSCI ESG Research in order to increase its sectoral and geographic granularity.

Estimates of the financial implications of transition risk are calculated by looking at the aggregate costs and benefits each corporate may face under a particular scenario and discounting them to present value. These are then compared with each firm’s current valuation as measured by their enterprise value, ie the market value of their debt and equity combined.

This analysis could be done on around 85% of the CBPS holdings due to lower data availability for some corporates. The results (Chart 4.8) show, unsurprisingly, that average costs facing those companies are higher under the late policy action scenario than in the early policy action scenario. (The horizontal line shows the range of impacts on enterprise value across companies, the box shows the interquartile range and the vertical line shows the median impact.) This is because it is assumed that policy actions to deliver net zero will need to be more aggressive if their introduction is delayed, to make up for the adjustment lost through initial inertia.

Chart 4.8: Scenario analysis impact on corporate valuations ^{(a)(b)(c)(d)(e)}

Footnotes

• Sources: Certain information ©2021 MSCI ESG Research LLC, reproduced by permission, and Bank calculations.
• (a) Company value refers to enterprise value, which is the combined market value of a company’s debt and equity.
• (b) These estimates factor in potential financial risks associated with transition risk only. They do not incorporate potential impacts of physical risks.
• (c) Coverage for this metric is around 85% of the CBPS.
• (d) These boxplot charts show the minimum and maximum values (horizontal line), the interquartile range (navy box) and the median impacts (centre pink line).
• (e) Outliers beyond 1.5 times the interquartile range are excluded.

Chart 4.9: Scenario analysis impacts of the late policy scenario on corporate valuations by sector ^{(a)(b)(c)(d)(e)}

Footnotes

• Sources: Certain information ©2021 MSCI ESG Research LLC, reproduced by permission, and Bank calculations.
• (a) Company value refers to enterprise value, which is the combined market value of their debt and equity.
• (b) These estimates factor in potential financial risks associated with transition risk only. They do not incorporate potential impacts of physical risks.
• (c) Coverage for this metric is around 85% of the CBPS portfolio.
• (d) These boxplot charts show the minimum and maximum values (horizontal line), the interquartile range (navy box) and the median impacts (centre pink line).
• (e) Outliers beyond 1.5 times the interquartile range are excluded.

This type of modelling can also help to identify differences in relative exposures to transition risk across sectors and/or individual firms. Chart 4.9 gives an example of this kind of breakdown for the late policy action scenario and shows that the energy sector (meaning companies that are directly involved in the extraction and production of natural resources such as oil and gas) would be the most exposed in this scenario on average. It also highlights that within some sectors, such as electricity, there is a fairly even distribution between firms that face aggregate potential costs and firms that face aggregate potential benefits. That is because a number of these electricity companies are likely to benefit from the production and delivery of renewable energy.

While such analysis is useful for identifying potential risks, for those managing portfolios it cannot substitute for detailed bottom-up risk analysis that considers companies’ management actions and capital expenditure plans. The Bank encourages the development of scenario analysis. As these approaches develop, such analysis will increasingly inform our financial risk assessments.

Physical risk

The corporate physical risk scores in this year’s report represent a weighted average of three main channels of risk: the geographic location of a firm’s direct operations; the location of firms’ supply chains; and the location of their consumer markets – weighted 70%, 15% and 15% respectively. These locations are determined based on granular asset-level data mapping and so weather events can be considered specific to those locations rather than the country as a whole. In this approach, scores estimate potential future physical risks between 2030 and 2040, and are based on an assumption that the world remains on its current trajectory (ie no additional policy action is taken in future beyond what is already planned today).

There have been several changes made to our preferred scorecard methodology since last year. As with the sovereign scores, these include the recalibration of the scorecard to represent direct percentile rankings, and more granular location data on flooding. These have resulted in some adjustments to the absolute scores and in the relative ranking of individual climate hazards. For example, scores now indicate a relatively higher exposure to some extreme weather event types (eg hurricanes) than was previously estimated. We have again recalculated last year’s metrics using this year’s methodology in order to show changes year on year on a consistent basis.

Using this method, physical risks to the CBPS holdings are judged to be moderate and broadly in line with a year earlier, when controlling for the methodology change. Portfolio level risks remain largely concentrated in the bottom half of those companies assessed worldwide by the data provider, indicated by scores less than 50 (Chart 4.10). Risks to firms’ supply chains (‘supply chain risk’) – particularly those in overseas locations – tend to be higher than those facing their direct operations (‘operations risk’) and consumer markets (‘market risk’). These overall scores are somewhat higher than the sovereign equivalent shown in Chart 4.1. Differences in scores stem in part from the more granular geographic mapping of companies’ assets to specific regions of the UK, which may be more susceptible to physical risks such as flooding or sea-level rise than the country as a whole. In addition, while making a material contribution to the UK, a number of companies have non-UK supply chains and operations in areas subject to greater climate risks.

Chart 4.10: Physical risk scores for the CBPS holdings ^(a)(b)

Footnotes

• Sources: Four Twenty Seven and Bank Calculations.
• (a) ‘Operations risk’ is the summary score for a company’s owned or operated assets across all climate hazards and for ‘Socioeconomic risk’, which is a measure of a company’s broader operating environment at country level. ‘Market risk’ is the summary score for a company’s exposure to physical climate risk within their end markets. ‘Supply chain risk’ is the summary score for a company’s exposure to physical climate risk within its supply chain, upstream of direct operations.
• (b) This analysis is based on coverage of 72%. Unlisted corporates are not covered by this assessment.

This methodology is useful for identifying companies with elevated risk exposures. For example, 10 companies (representing 6% of the holdings by value) have overall risk scores of 75 or above, indicating that their physical risk exposure is in the top 25% of companies assessed by this methodology. The majority of these firms are in the consumer, non-cyclical sector (eg pharmaceuticals, food and beverage companies), which have relatively high natural resource dependencies because their operations tend to be energy-intensive and require water as an input into the manufacturing process. Other companies with risk scores greater than 50 tend to be in the utilities and industrial and transport sectors. These companies similarly face elevated exposures to heat and water stress, given the energy-intensive nature of their business and their costly infrastructure.

While these scores provide a useful indication of physical risk exposure, it is also possible to use scorecard indicators to consider how firms are managing this exposure. One such approach evaluates a company’s managerial approach to physical risks across different physical risk management indicators: leadership (how companies communicate the consequences of physical risk for their activities); implementation (measures implemented to combat these risks); and results (improved performance based on the implementation of these measures). These indicators are assessed on a four point scale: ‘weak’, ‘limited’, ‘robust’ and ‘advanced’.

Using these scores, approximately two thirds of the companies in the CBPS holdings exposed to the greatest physical risks (ie with risk scores of 75 and above) receive ‘advanced’ scores for physical risk leadership (ie the top score), and approximately half of those companies receive scores of ‘robust’ for implementation. Companies score more weakly when it comes to reporting of results, when using a threshold of three years or more of consistent physical risk reporting.

These types of considerations are important, as companies that are currently performing poorly in their internal physical risk management processes and also have higher physical risk exposures could pose more of a risk overall. We are looking at how we might integrate these types of considerations into our internal risk management frameworks.

As with transition risk, while the above scores give an indication of the potential future physical risk exposure faced by corporates, the range of potential future pathways for physical risks is broad and uncertain – and heavily dependent on actions taken in the coming years. An initial attempt to consider the potential future financial risks associated with different climate pathways is presented in Box F. Unsurprisingly, this analysis suggests that risks facing companies will be highest in a scenario where no further action is taken to mitigate climate change, and will be greatest for the utilities and consumer non-cyclical sectors.

Box F: Modelling the financial impacts of physical risk: scenario analysis

For this assessment, Moody’s Analytics’ methodology aims to assess the potential impact of physical risks on companies’ future probabilities of default. As with the analysis presented in Box E, this analysis aims to capture climate risks that occur at much longer time horizons than those considered by most traditional models.

For this analysis, the same scenario narratives are considered as in Box E – ie early and late global policy action – but Moody’s focuses on risks out to 2050 rather than to 2100. An additional scenario is also included where no additional policy action is taken, ie governments do not introduce policies to address climate change beyond those already announced. In this case, the physical risk variables are extended further out (an additional 30 years) in order to capture the more severe physical risks that are anticipated to occur in the second half of the century. This is in line with the approach being taken in the Bank’s forthcoming CBES exercise.

Under each of these scenarios, the world experiences different levels of emissions and subsequent degrees of warming, and this leads to different levels of ‘economic damages’ (ie loss in economic value). Estimates of global economic damages are taken from an industry standard climate model,^{footnote [31]} extended by Moody’s Analytics to produce location-specific estimates of future economic damages from adverse weather events. Many assumptions are needed to do this – including estimates of the frequency of climate events (eg floods or hurricanes) and the expected cost of economic damages arising from those events. At firm level, the exposure to these events, and therefore expected damages, are determined using the physical risk scores discussed above for corporates.

These scenario-specific, firm-level estimates of climate damages can then be converted into implied probabilities of default for each company, using estimates of the historic impact of climate damages on asset price volatilities.^{footnote [32]} Chart 4.11 shows the average estimated increase in probabilities of default for corporates in the CBPS holdings at 10, 20 and 30-year intervals, split by scenario and sector.

The chart shows the average basis point increase in PDs by sector, to illustrate the extent to which PDs could increase in these different scenarios. It shows that increases in PDs are, unsurprisingly, highest under the no additional policy action scenario. For some of the firms in each sector, these basis point increases represent at least a doubling when compared to the firm’s original PD. Contrary to our assessment of transition risks (Box E), physical risks faced in the early and late policy action scenarios are quite similar in magnitude to each other. This is because CO₂ remains in the atmosphere for many years after it was first emitted and so an amount of climate damage is already unavoidable.

This type of analysis provides an initial indication of the potential financial materiality of the physical risk exposures discussed in the previous section. However, at this stage the estimates remain indicative given the number of assumptions used. Estimates like these are likely to become more robust as climate scenarios become more standardised and methodologies develop further. For now they are presented below as an illustration of the type of analysis currently possible and how we would like to develop our disclosure.

Chart 4.11: Basis point increase in PD by sector due to physical risk under three alternative policy scenarios ^(a)(b)(c)

Footnotes

• Sources: Four Twenty Seven, Moody’s Analytics and Bank calculations.
• (a) These PD estimates only estimate the potential increase in risk due to physical risks. They do not factor in the potential impact of transition risks under each of these scenarios.
• (b) This chart plots the forward PD at 10, 20 and 30-year time intervals. The forward PD measures the expected PD of the company, assuming it survives to that year.
• (c) This analysis is based on coverage of 72%. Unlisted corporates are not covered by this assessment.

Key climate-related risks to the Bank’s physical operations

The Bank’s physical operations are exposed to the risks from both the physical effects of climate change and the transition to a net-zero economy. Although not significant, physical risks could impact maintenance of our buildings and property, for instance by increases in flood risk or peak summer temperatures. Transition climate risks affect areas such as energy usage and air travel, for example through future fluctuations in energy prices or the potential introduction of a carbon price. Physical and transition risks also impact the companies which supply the Bank with goods, services and raw materials; for instance companies providing data storage services, or those that supply the Bank with key raw materials used to produce banknotes.

Carbon footprint

The Bank monitors its exposure to transition risks by tracking its carbon footprint.^{footnote [33]} This year the Bank’s carbon footprint reduced by 53% compared to 2019/20 and by 46% compared to the baseline year;^{footnote [34]} the largest decrease in carbon emissions in a single year since the Bank first calculated its footprint in 2015/16, as Chart 4.12 illustrates. Some of the changes in working practices, which contributed to this reduction, are known to give rise to emissions not currently captured in our carbon footprint (eg emissions associated with home energy usage). Where these changes may remain relevant in future years, we have produced preliminary analysis of the associated emissions to help inform future strategy (Box G).

Chart 4.12: The Bank’s carbon footprint since 2015/16

Footnotes

• Source: Bank of England.

Table 4.B sets out the Bank’s 2020/21 carbon footprint in detail and compares it to both 2019/20 and the 2015/16 baseline year.

Over half of the 2020/21 decrease in emissions, relative to 2019/20, was due to the Bank’s move to renewable electricity. Total electricity consumption remained in line with prior trends, falling ~5% year on year from 33.5m kWh in 2019/20 to 31.8m kWh in 2020/21. However, the switch to renewable sources of electricity in April 2020 led to the associated carbon emissions for 2020/21 falling 91%, from 5,838 tCO₂e to 498 tCO₂e. This element of the reduction in emissions represents a permanent change, which the Bank will continue to benefit from in future years.

The remainder of the decrease in emissions relative to 2019/20, just under half, was largely driven by changes in working practices in response to Covid, with air travel falling to record low levels. We expect some reversion of this as Covid restrictions are lifted and some level of air travel resumes. Although this element of the 2021 results is not permanent, the Bank is considering ways it can draw on the experience to inform its plans to reduce carbon emissions in future.

The vast majority of the Bank’s carbon emissions in 2020/21 came from natural gas usage (24%) and polymer substrate used in the production of banknotes (68%).

The Bank’s use of natural gas has increased slightly this year, relative to 2019/20, as Covid guidance recommends increased ventilation, which increases heating requirements. The climate impact of these changes have been partially mitigated by the installation of a new integrated energy monitoring system, allowing energy use at our Threadneedle Street, Debden and Moorgate buildings to be monitored from a single location. This system facilitates optimisation of energy usage within the Bank by enabling faster identification of issues and providing improved analytics.

The Bank produces new banknotes in order to meet future public demand. Since the Bank does not control the quantity of banknotes required and the total associated carbon emissions, it does not form part of the Bank’s 2030 carbon target, as detailed in Annex 2. The 2015/16 baseline year saw abnormally low production ahead of the transition to polymer banknotes. Consequently, carbon emissions rose in subsequent years due to production of the launch stocks for new polymer issues, peaking in 2018/19. Following the completion of the transition to polymer banknotes in 2021, we expect production of new notes to fall in the medium-term.

Working with suppliers, the Bank seeks to decrease the carbon intensity of new banknotes over time through carbon reduction initiatives. Table 4.C shows the carbon emissions from polymer substrate production by denomination per 1,000 finished banknotes since 2017/18, which has reduced for each denomination over time. Additionally, the Bank continues to reduce the carbon footprint of banknotes through the polymer procurement process. Our most recent tender processes have secured carbon neutrality for future contracted supply of polymer substrate for all denominations. This will be achieved by our suppliers through both further carbon reduction initiatives and the purchase of offsets. Although the Bank has secured carbon neutrality in relation to future polymer substrate supply, due to the GHG reporting regulations, these emissions are still, and will continue to be, reported by the Bank, since the offsets are purchased by the suppliers.

Assessing and managing the carbon footprint of our supply chain is a priority for the Bank. In 2020 the Bank was awarded the Institute of Environmental Management and Assessment sustainable procurement award, in recognition of our work to embed sustainability in our procurement processes. To further improve the Bank’s understanding of its key supply chain emissions, it has commissioned an external provider to assess key suppliers, and rate them on their sustainability and emissions. This will allow the Bank to further improve its Scope 3 carbon footprint.

The Bank is taking action to reduce the carbon footprint of its technology estate. We are moving our data centre estate to outsourced providers who have an improved carbon footprint based on newer facilities, updated technologies and energy efficiency savings made possible by larger-scale operations. We are also transitioning some of that estate to cloud-based services, and have embedded environmental considerations within the procurement process.

Looking ahead, the Bank is actively exploring the case for a central bank digital currency (CBDC).^{footnote [35]} While a CBDC would be a new form of digital money, it would be fundamentally different to a crypto asset and would therefore not make use of the same energy-intensive technologies that underpin some crypto assets.^{footnote [36]} The Government and the Bank have not yet decided whether to introduce a CBDC in the UK, and will engage widely with stakeholders on the benefits, risk and practicalities of doing so. Any future decisions on CBDC issuance and design would take into account the Bank’s climate strategy and, wherever relevant, the recent changes in the remits and recommendations to Bank’s policy committees.

The Bank has also identified that its long-term capital investments could be impacted by a potential increase in costs if a carbon price was introduced. To mitigate the risk of future increases in the carbon price on its capital investments, the Bank is using an internal carbon price. This aims to support long-term decision-making and investing that is better aligned with a net-zero economy. The internal carbon price has initially been set at £45/tonne CO₂. It will be reviewed at regular intervals.

Carbon targets

In 2020 the Bank set its 2030 carbon target to reduce its absolute GHG emissions by 63% from 2016 to 2030, covering our Scope 1 emissions (use of natural gas, fuel and refrigerants), Scope 2 emissions (electricity) and travel emissions (which fall within Scope 3). These targeted emissions exclude banknote production for the reasons set out earlier. The target is informed by the SBT methodology and has been verified by the Carbon Trust as consistent with aligning emissions from our physical operations to the goals of the Paris Agreement.

The combination of the Covid impact on air travel and the movement to renewable sources of electricity led to the Bank temporarily exceeding its 2030 carbon target this year with a 74% reduction in targeted emissions compared to the 63% target. As noted previously, we would expect some of this reduction to unwind as Covid restrictions relax and some level of air travel resumes. However, we expect the Bank will remain on track to meet its 2030 carbon target. Table 4.D sets out the emissions within scope of the Bank’s 2030 carbon target for 2020/21, and compares them to both 2019/20 and the 2015/16 baseline year.

Beyond its 2030 carbon target, the Bank has also committed, for the first time, to reduce emissions from its physical operations so they will be consistent with net zero by 2050 at the latest. This net-zero carbon target will cover the full scope of the Bank’s physical operations, including emissions from banknote production and is consistent with the target in the Climate Change Act 2008 (Order 2019).

Box G: Estimating the carbon emissions associated with working from home

There is currently no standard methodology for calculating emissions associated with working from home, so we do not include this in our own carbon footprint. We have, however, undertaken some preliminary work this year to understand the potential impact of working from home, given this may become more common in future.

For 2020/21 we estimated the emissions associated with working from home for colleagues based at our Threadneedle Street premises (which represents around 55% of our staff) in two specific circumstances: firstly when only the home office was heated (scenario 1); and secondly when the whole home was heated (scenario 2). We then overlaid emissions associated with the Threadneedle Street building energy usage to arrive at an overall estimate of the carbon footprint associated with the building. The results are set out in Chart 4.13.

We found that the emissions associated with Threadneedle Street remain relatively constant independent of the number of staff working in the building, reflecting the need to maintain a minimum temperature to keep the building operational. Chart 4.13 shows movements in emissions from Threadneedle Street usage of both electricity and natural gas. However these are primarily driven by factors unrelated to home working. Office natural gas usage increased by 37% from 2019/20 to 2020/21. This relates primarily to the increased ventilation requirements due to Covid, described previously, and is therefore expected to reverse as Covid restrictions relax. Emissions due to office electricity usage decreased by 92% from 2019/20 to 2020/21 due to the Bank’s move to renewable electricity. This will be a permanent change; future emissions from office electricity are expected to remain close to 2020/21 levels.

We have also estimated emissions from heating homes and commuting. While the reduction in commuting due to lockdown measures is estimated to have reduced emissions to some degree, this is more than offset by increased emissions from heating homes. Even in the best case scenario, in which staff are assumed to heat only their home office (scenario 1), total emissions associated with home energy usage and commuting in 2020/21 are 51% higher than those from commuting in 2019/20. If, on the other hand, staff decided to heat their entire homes rather than just their home office (scenario 2), the resulting emissions from home energy usage and commuting are estimated to be 434% higher than those from commuting in 2019/20.

Although the analysis was necessarily high level, reflecting the broad assumptions underpinning the work, it highlights the potential for home working to result in a significant increase in emissions. To help combat this effect, the Bank ran internal awareness campaigns to inform colleagues of the benefits of improving home insulation and adopting heating controls to optimise their home heating.

Looking ahead, the Bank will seek to consider the impact of home working when forming future climate strategy around its physical operations. The Bank will also explore ways in which it could add these emissions to its reportable footprint, dependent on the extent to which colleagues adopt new ways of working after the Covid restrictions lift, as well as the progress made in development of a standardised method for calculating these emissions.

Chart 4.13: Indicative estimate of emissions associated with Threadneedle Street building including emissions related to home working ^{(a)(b)(c)(d)(e)(f)}

Footnotes

• Source: Bank of England.
• (a) The office heating figures represent actual emissions associated with electricity and natural gas used in our Threadneedle street building over the periods 2019/20 and 2020/21, whereas the home heating and commuting figures are estimates.
• (b) For the purposes of the chart it is assumed there was no home working in 2019/20, but that all colleagues worked permanently from home in 2020/21.
• (c) Scenario 1 assumes only the office area is heated when working from home, and the home office would not have been heated otherwise.
• (d) Scenario 2 assumes the whole home is heated when working from home, and the home would not have been heated otherwise.
• (e) Both scenarios 1 and 2 assume that half of the staff occupy two-bed flats, and half occupy 3 or 4-bed houses. All staff members are assumed to live in separate locations.
• (f) The 2020/21 commuting figures assume no commuting, but that train and bus services still run. To reflect the reduced service calculations include 10% of the 2019/20 emissions associated with bus and train travel.

Annexes

• Annex 1: Abbreviations

  ARCo – Audit and Risk Committee.

  APF – Asset Purchase Facility.

  Bank – The Bank of England.

  BCBS – The Basel Committee on Banking Supervision.

  BEIS – The UK government department for Business, Energy and Industrial Strategy.

  CAT – Climate Action Tracker.

  CBDC – Central Bank Digital Currency.

  CBES – Climate Biennial Exploratory Scenario.

  CBPS – Corporate Bond Purchase Scheme.

  CCC – Committee on Climate Change.

  CCFF – Covid Corporate Financing Facility.

  CFRF – Climate Financial Risk Forum.

  CO₂ – carbon dioxide.

  CO₂e – carbon dioxide equivalent.

  COP26 – the twenty-sixth session of the Conference of the Parties.

  Court – Court of Directors.

  Covid-19 (Covid) – severe acute respiratory syndrome coronavirus 2.

  CP – commercial paper.

  CRR – Capital Requirements Regulation.

  DLT – Distributed Ledger Technology.

  EDCSG – Executive Directors’ Climate Steering Group.

  EOC – Executive Operations Committee.

  ERC – Executive Risk Committee.

  ExCo – Executive Committee.

  FCA – Financial Conduct Authority.

  FPC – Financial Policy Committee.

  FSB – Financial Stability Board.

  G7 – Group of Seven – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

  G20 – Group of Twenty – Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States.

  GDP – gross domestic product.

  GHG – greenhouse gas.

  Gilts – sterling sovereign government bonds.

  IAIS – International Association of Insurance Supervisors.

  IPCC – Intergovernmental Panel on Climate Change.

  ITR – Implied Temperature Rise.

  MPC – Monetary Policy Committee.

  NGFS – Network for Greening the Financial System.

  PCC – Policy Co-ordination Committee.

  PD – probability of default.

  PRA – Prudential Regulation Authority.

  PRC – Prudential Regulation Committee.

  SBT – Science Based Target.

  SECR – Streamlined Energy and Carbon Reporting.

  SIF – Sustainable Insurance Forum.

  SMF – Senior Management Function.

  SSB – Sustainability Standards Board.

  TCFD – Task Force on Climate-related Financial Disclosures.

  UNFCCC – United Nations Framework Convention on Climate Change.

  WACI – weighted average carbon intensity.

• Annex 2: How the Bank monitors carbon emissions from its physical operations

  Overview

  The Bank monitors its GHG emissions from its physical operations as a whole, by tracking its ‘carbon footprint’. In 2020 the Bank set a target to cut some elements of our carbon footprint by 63% from 2016 to 2030. This target covers our Scope 1 emissions (use of natural gas, fuel and refrigerants), Scope 2 emissions (electricity) and travel emissions (which fall within Scope 3), and is known as the Bank’s ‘2030 carbon target’.

  The Bank will report on its carbon footprint and progress towards its 2030 carbon target each year, both in this report and in its Annual Report. This annex provides further information on the Bank’s carbon footprint and its 2030 carbon target.

  Scope

  The Bank’s 2030 carbon target does not include all activities that make up the Bank’s carbon footprint: The Bank’s carbon footprint includes the activities considered to contribute to the vast majority of its emissions, while the 2030 carbon target focuses only on those emissions the Bank can influence most effectively by changing its behaviour, for instance by reducing travel. Table A2.1 sets out the emissions included in the Bank’s carbon footprint and 2030 carbon target.

  Table A2.1: Emissions included in the Bank’s carbon footprint and 2030 carbon target

  Type of emissions	Activity	Included in carbon footprint	Included in 2030 carbon target
  Direct (Scope 1)	Natural gas	Yes	Yes
  	Oil – generators	Yes	Yes
  	Vehicles fleet	Yes	Yes
  	Refrigerants	Yes	Yes
  Direct (Scope 2)	Electricity	Yes	Yes
  Indirect (Scope 3)	Electricity (transmission and distribution)	Yes	No
  	Air travel	Yes	Yes
  	Rail travel	Yes	Yes
  	Water	Yes	No
  	Office paper	Yes	No
  	Waste	Yes	No
  	Paper (banknotes)	Yes	No
  	Polymer (banknotes)	Yes	No

  Footnotes

  • Source: Bank of England.

  There are some areas in which the Bank cannot make a significant emissions reduction. The production of banknotes is a key example of this as the polymer used represents a large proportion of the embodied carbon associated with banknote production. This cannot be reduced significantly within the GHG protocol reporting framework without reducing the number of banknotes printed or moving to recycled polymer. The Bank prints sufficient banknotes to meet demand and cannot move to recycled polymer for technical and security reasons. As such, the Bank is unable to directly control the carbon emissions associated with banknote production.

  The Bank is taking action to reduce the carbon and environmental impact of banknote printing, including embedding carbon and environmental criteria in the tenders for the provision of new polymer. This has had a positive impact on supplier emissions, for example by encouraging suppliers to invest in carbon reduction initiatives and offsets to achieve carbon neutrality for polymer production. However the GHG protocol does not allow offsets purchased by suppliers to be counted when calculating organisational carbon footprint and reduction, and these will therefore not be included in the Bank’s calculations.

  Baseline

  Both the Bank’s 2030 carbon target and the Bank’s carbon footprint are tracked with reference to its performance in 2015/16 (the baseline). The composition of these baselines is set out in Table A2.2 below.

  Table A2.2: Total emissions for the baseline year for the Bank’s 2030 carbon target and carbon footprint ^(a)(b)(c)

  Type of emissions	Activity	Carbon footprint 2015/16 baseline year	2030 carbon target 2015/16 baseline year
  		tCO2e	tCO2e
  Direct (Scope 1)	Natural gas	2,890	2,890
  	Oil – generators	5	5
  	Vehicles fleet	97	97
  	Refrigerants	53	53
  	Subtotal	3,045	3,045
  Direct (Scope 2)	Electricity	5,563	5,563
  	Subtotal	5,563	5,563
  Indirect (Scope 3)	Electricity (transmission and distribution)	1271	NA
  	Air travel	4,334	4,334
  	Rail travel	33	33
  	Water	60	NA
  	Office paper	96	NA
  	Waste	32	NA
  	Subtotal	5,826	4,367
  	Paper (banknotes)	3,360	NA
  	Polymer (banknotes)	2,333	NA
  	Subtotal	5,693	–
  Total gross emissions (tCO2e)		20,127	12,975

  Footnotes

  • Source: Bank of England.
  • (a) The baseline includes a market-based emissions factor approach, which means that the Bank’s electricity emissions are calculated on the basis of its energy supplier’s carbon emissions, rather than the national average. This allows the Bank to reflect the emissions associated with the electricity it purchases.
  • (b) Banknote production was not included in the Bank’s carbon footprint prior to 2020 (paper and polymer). 2015/16 represented the final year before the Bank started the transition to polymer banknotes and production volumes were exceptionally low. As such, 2015/16 is not representative of typical banknote production rates. To aid transparency, the Bank has published an additional metric on polymer carbon emissions per 1,000 finished notes. Publishing this additional metric allows changes to the carbon efficiency of substrate production to be tracked independent from the quantity of banknotes being produced.
  • (c) The figures reported in relation to banknotes refer to the carbon emissions due to the manufacture of the paper and polymer substrate, and do not refer to the lifecycle emissions of finished banknotes.

  Setting the 2030 carbon target

  To set its 2030 carbon target the Bank used a SBT method. SBT is the best-practice methodology for setting an evidence-based emissions reduction trajectory. SBTs are linked to the total volume of carbon that can be emitted into the atmosphere while keeping global temperature rises below 1.5°C. This global budget is then broken down by country and sector.

  SBTs can be calculated based on the sector of operation. However, at the time of developing the Bank’s 2030 carbon target there was no SBT approach for central banks. Instead, the Bank applied the commercial buildings approach, which was considered to be the best fit given the nature of the Bank’s operations. The trajectory for emission reduction to 2030 was informed by this methodology.

  The full SBT methodology requires detailed investigation of emissions associated with the Bank’s supply chain (ie emissions linked to products and services the Bank purchases). This is typically time consuming and, as a result, expensive. The Bank has taken a more pragmatic and cost-effective approach. Its 2030 carbon target is calculated using the SBT methodology, but focuses only on those emissions that have the largest impact, and that the Bank can influence. As a result the Bank’s targets are informed by the SBT methodology, without official verification from the SBT Institute. The Carbon Trust have however verified the Bank’s targets to 2030, reviewed its methodology and the recalculated baseline, and provide third party assurance that it considers the items reviewed to be sound.

  Historic carbon reporting format

  To better reflect its operations, in 2019/20 the Bank announced three changes to the way it reports its carbon footprint and 2030 carbon target. It removed Roehampton Sports Centre from the calculations, as it is in the process of being sold. It moved to a market-based emissions factor approach, which means that the Bank’s electricity emissions are now calculated on the basis of its energy supplier’s carbon emissions, rather than the national average. This allows the Bank to reflect more accurately the emissions associated with the electricity it purchases. And for the carbon footprint only, paper and polymer used in banknote production has been brought within scope for the carbon footprint, as banknote production will represent an increasing proportion of the Bank’s carbon footprint as other sources of emissions are reduced.

  Although the changes were outlined in Annex 2 of the 2019/20 climate report, 2020/21 is the first year that they will be reflected in the Bank’s reporting.

  To facilitate comparison with previous reporting, we have set out below the Bank’s 2020/21 carbon footprint and 2030 carbon target using the historic reporting format ie including the Roehampton site, excluding emissions associated with polymer, and using the national average electricity carbon factor. The downward trend in emissions, shown in Table A2.3 below reflects reduced emissions due to electricity and air travel.

  Table A2.3: The Bank’s carbon footprint for 2020/21 reported in the historical format

  Type of emissions	Activity	Carbon footprint (tCO2e)	Per cent of total	Per cent change from baseline
  Direct (Scope 1)	Natural gas	3,038	27%	-5%
  	Oil – generators	9	0%
  	Vehicles fleet	51	0%
  	Refrigerants	141	1%
  	Subtotal	3,239
  Direct (Scope 2)	Electricity	7,418	65%	-54%
  	Subtotal	7,418
  Indirect (Scope 3)	Electricity (transmission and distribution)	638	6%	-87%
  	Air travel	18	0%
  	Rail travel	0	0%
  	Water	67	1%
  	Office paper	2	0%
  	Waste	31	0%
  	Subtotal	756	-
  	Paper (banknotes)	Not included in scope in the historic format
  	Polymer (banknotes)
  	Subtotal
  Total gross emissions (tCO2e)		11,413	100%	-55%

  Footnotes

  • Source: Bank of England.

• Annex 3: Energy consumption and carbon data

  The Streamlined Energy and Carbon Reporting (SECR) regulations are designed to increase the awareness of energy costs within organisations, help reduce overall impact on climate change and increase transparency. SECR requires large companies to report annually on energy consumption, related carbon emissions and metrics and historical data.

  Where a subsidiary organisation needs to report, the parent organisation can choose to publish a group-level report. Although the Bank does not fall within the criteria for the SECR regulations, some of the Bank’s subsidiary organisations do, and therefore the Bank has chosen to comply with SECR requirements to follow best practice.

  The Bank’s carbon footprint and intensity metrics are included within the main body of this report. Table A3.1 and Chart A3.A below show the electricity and natural gas consumption for all Bank sites, as well as fuel purchased for travel (direct purchase of fuel for Bank-owned and operated vehicles, plus staff mileage). This does not include fuel used for air or rail travel.

  Table A3.1: Energy consumption at all Bank sites since 2015/16

  Total energy use (kWh)	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21
  Electricity	35,039,405	36,595,009	35,815,517	34,431,895	33,510,896	31,816,328
  Natural gas	18,024,557	17,165,401	17,919,521	16,462,358	15,142,556	16,521,754
  Road transport	628,230	580,583	490,164	401,019	370,373	201,841
  Total	53,692,192	54,340,993	54,225,202	51,295,272	49,023,825	48,539,923

  Footnotes

  • Source: Bank of England.

  Chart A3.A: Energy consumption for all Bank sites since 2015/16

  

  Footnotes

  • Source: Bank of England.

  Chart A3.A shows an overall downward trend in total energy consumption across the period from 2015/16 to 2020/21, with electricity consumption falling consistently over the past four years. Natural gas use has increased in the past year due to Covid ventilation requirements; our buildings need to use more fresh air for ventilation, instead of recirculating warm internal air. As this colder external air enters the building it needs to be heated, resulting in an increase in natural gas use. Our operations and maintenance staff have however worked hard to minimise this increase in natural gas consumption.