The Bank of England's climate-related financial disclosure 2022

Foreword

The Bank of England’s mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. A key aspect of delivering this mission is to manage the financial risks and economic consequences arising from the physical effects of climate change and the transition to net-zero emissions on our policy functions and internal operations. This report sets out our approach and assessment of climate change risk which we have produced in line with the framework developed by the Taskforce on Climate-related Financial Disclosures.

Over the past year, we have made progress with the completion of several multiyear climate risk related initiatives. This includes reporting on the progress banks and insurers have made against our climate related supervisory expectations, setting out our initial views of how climate change is reflected in regulatory capital requirements, publishing a comprehensive framework to green our corporate bond holdings, supporting the UK Government in its presidency of the G7 and hosting of COP26, and the publication of the results of our climate change scenario exercise.

In February 2022, we announced our plan to wind down our stock of corporate bond holdings and will consider the impact of greening as we do so, to the extent consistent with wider aims. This year’s report reflects detailed analysis of the climate risk profile of our portfolios, including through better measurement methodologies and more sophisticated scenario-based assessments of climate risks.

Our physical operations remain on track to achieve our target to reduce emissions by 63% in 2030 from 2016 levels and next year we will publish our transition plan for achieving net-zero emissions from our physical operations.

Looking ahead, we will continue to advance our understanding of the macroeconomic implications of climate change and net-zero transition, both domestically and internationally through groups like the G7 and the Network for Greening the Financial System.

We continue to be ambitious in our approach and hold ourselves to the same high standards that we require of the firms we regulate. For example, we will consider how the recommendations of HM Treasury’s Transition Plan Taskforce and the emerging disclosure standards from the International Sustainability Standards Board could be reflected in our future disclosures.

Ben Stimson
Chief Operating Officer of the Bank of England

Executive summary

The Bank has committed to publish annual climate disclosures. This is the third climate disclosure the Bank has produced, setting out the key climate-related developments in the year to February 2022. It builds on the Bank’s second climate disclosure by reflecting: the progress the Bank has made on its climate work plan over the past year; advances in climate data and modelling applied to its financial asset portfolios; progress on reducing emissions from its physical operations; and progress in the domestic and international climate agenda. In response to these developments, the Bank has refreshed the priorities that underpin its climate strategy.

Climate change and the transition to a net-zero economy are relevant to the Bank’s mission to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. The physical effects of climate change and the transition to a net-zero economy can create financial risks and economic consequences, which can affect: the safety and soundness of the firms the Bank regulates; the stability of the financial system; and the economic outlook.

To respond to the broad range of climate-related financial risks in an effective and strategic manner, the Bank has designated Climate Change as one of its seven strategic priorities covering the four-year period to February 2024. In support of this the Bank will continue to fulfil its obligations under its remits and mandate, while focussing its efforts on where it can make the biggest contribution domestically and internationally.

As with the Bank’s previous climate disclosures, this year’s disclosure 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 (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. Climate risks are also subject to additional governance processes due to the inclusion of Climate Change as one of the Bank’s seven strategic priorities.

The Bank’s climate work is led by two Executive Sponsors: Sarah Breeden (Executive Director for Financial Stability Strategy and Risk) covers the Bank’s policy functions and Ben Stimson (Chief Operating Officer) covers the Bank’s physical operations. Climate change is relevant to many parts of the Bank; from sourcing polymer for banknote production to setting risk management expectations for banks and insurers regulated by the Bank, through the Prudential Regulation Authority (PRA). For that reason, the Bank has an Executive Director level steering group to co-ordinate and to deliver climate-related work across the Bank.

Strategy

The objective of the Bank’s work on climate change is to play a leading role, through its policies and operations, in ensuring the financial system, the macroeconomy, and the Bank are resilient to the risks from climate change and are supportive of the transition to a net-zero economy.

Our work is also supportive of the UK’s commitment in the Climate Change Act (2008) to achieve net-zero greenhouse gas (GHG) emissions by 2050. Furthermore, HM Treasury has included in the remit and recommendation letters to the Bank’s policy committees the need to have regard to the UK Government’s economic strategy of a transition to a net-zero economy.

To achieve its objective the Bank’s climate strategy is built around five key goals:

Progress has been made against these goals over the past year, such as the publication of the results of the Bank’s CBES exercise for major UK banks and insurers. Delivering against these priorities in the longer-term will fulfil the Bank’s role in building system-wide resilience and supporting the transition to net zero.

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 climate disclosure sets out the Bank’s approach to measuring and managing these risks.

Over the past year the Bank has implemented a number of enhancements to its management of climate risk. Since approval in June 2021, the Bank’s critical metrics for climate change risk have been reported regularly to the Bank’s executive and non-executive risk committees and periodically to the Bank’s Court of Directors (Court), which acts as a unitary board. The Bank has also produced internal guidance to assist business areas in assessing and reporting climate change risks, with the aim of encouraging more comprehensive thinking about the impact of climate change risk and to foster increased consistency of reported risks.

The Bank’s financial operations

The Bank continues to seek to demonstrate best practice in climate risk reporting by disclosing climate risk analysis of its asset holdings, and enhancing its analysis to align with the latest guidance. For the first time, this year the Bank has broadened its carbon footprint metrics to include financed emissions, a TCFD-recommended measure that seeks to estimate the amount of absolute emissions associated with an investment. The Bank also continues to strengthen its forward-looking risk measures by incorporating the revised scenarios issued by the Network for Greening the Financial System (NGFS), reflecting the latest climate science.

There are several external features driving emissions estimates in the Bank’s financial operations in this year’s climate disclosure. As well as the result of decarbonisation initiatives across sovereign and corporate issuers, lags in emissions data mean that the impact of Covid-related lockdowns in 2020 is being seen for the first time in data on climate footprints in the corporate sector. Lags are longer in sovereign emissions data and so Covid-related impacts will not yet show up in the Bank’s holdings of sovereign assets.

For the Bank’s sovereign asset holdings, climate performance across a range of indicators remained better than reference portfolios and in line with previous trends. The carbon footprint of the Bank’s sovereign holdings – as measured by the Weighted Average Carbon Intensity (WACI) – fell, and remained lower than a G7 reference portfolio. This reflects the UK’s lower carbon footprint relative to a number of other large nations. On a forward-looking basis, enhanced commitments made by countries prior to the twenty-sixth session of the Conference of the Parties (COP26) in 2021 mean the issuers of the assets held by the Bank are now committed to outcomes consistent with a ‘below 2°C’ scenario – and are closer to, though not yet consistent with a 1.5°C scenario – if those targets are met. Uncertainties remain, however, over how governments will implement the necessary actions to deliver those targets. Measures of exposure to physical and transition risks in the Bank’s sovereign portfolios were also low relative to reference portfolios, remaining broadly similar to last year’s climate disclosure.

In November 2021, in line with HM Treasury’s update to the Monetary Policy Committee (MPC) remit earlier in the year, the Bank announced its intention to align its Corporate Bond Purchase Scheme (CBPS) portfolio with the UK’s overall commitment to achieve net-zero greenhouse gas emissions by 2050. The Bank published a comprehensive framework to support that goal, including an interim target of reducing the WACI of the portfolio by 25% between 2020 and 2025.^{footnote [1]} An initial programme of reinvestment operations to deliver that goal was completed between November 2021 and January 2022. For that round of purchases, the Bank refined the eligibility criteria to be consistent with the UK Government’s net-zero strategy and purchases of issuers were tilted towards stronger climate performers in accordance with a climate scorecard. Subsequent to those announcements, the MPC announced in February 2022 that it would reduce the stock of sterling corporate bonds through a programme of bond sales, winding down the entire portfolio, to be completed no earlier than towards the end of 2023 or in early 2024, subject to market conditions. In making these sales, the Bank will have regard to the ongoing diversification of the portfolio including greening. While the corporate holdings are to be unwound, the Bank’s framework, on which the subsequent reinvestments were based, supports climate transition by providing an example for other investors in the public and private sectors of how to green a corporate bond portfolio.

Using headline metrics, the carbon footprint of the Bank’s corporate holdings materially improved – though some of this reflected temporary Covid-related factors. The WACI of the CBPS in February 2022 fell 8% year on year to 233 tonnes of CO₂ per £ million of revenue (tCO₂e/£mn revenue), 18% below levels in the 2020 climate disclosure. Estimates for the financed emissions of the portfolio also indicated emissions reductions across the portfolio. This fall in overall emissions was driven by a combination of firms’ decarbonisation efforts and the temporary emissions reductions experienced during national lockdowns.

While the aggregate emissions profile of the Bank’s corporate holdings has improved, some Covid-related effects may unwind in future disclosures and so forward-looking climate metrics for corporate bonds may be more mixed. As set out by the MPC, the Bank will aim to complete sales of its corporate holdings by the end of 2023 or early 2024. Companies are increasingly setting more ambitious, science-based emission reduction targets. However, the more stringent forward-looking NGFS climate scenarios used this year suggest that corporate assets may be exposed to higher transition risks than under previous estimates. If companies issuing such debt do not make sufficient progress towards their stated emissions reductions targets, future impacts of the valuation of that debt could be more severe than previous models suggested. The revised NGFS scenarios used in those models highlight the need for widespread, rapid decarbonisation in the corporate sector to ensure the transition to net zero is orderly and financial risks are minimised.

The Bank’s physical operations

This year the Bank’s carbon footprint has continued to reduce due in part to the continuing effects of Covid, which are not expected to be sustained. It has fallen by 9% (1,027 tCO₂e) compared to 2020/21, and by 51% (10,311 tCO₂e) compared to the baseline year of 2015/16, against which the Bank measures progress.

The most significant contribution to the emissions reduction relative to 2020/21 was a decrease in both the number and carbon intensity of banknotes printed (801 tCO₂e). While the Bank works with suppliers to permanently improve the carbon intensity of the notes, the number of banknotes printed is driven by demand and is therefore variable.

The reduction relative to the baseline year (2015/16) was driven primarily by a fall in air travel influenced by Covid restrictions (4,197 tCO₂e) and the Bank’s shift to renewable sources of electricity (5,562 tCO₂e). While the reduction due to decreased air travel is expected to unwind as the impact of Covid diminishes, the Bank anticipates that it is unlikely to revert to 2019/20 levels due to new ways of working. The Bank’s move to a contract for the supply of renewable electricity is a permanent change, from which the Bank expects to benefit in future years.

The majority of the Bank’s carbon footprint this year came from either natural gas usage (30%) or polymer substrate used in the production of banknotes (67%). Although gas usage will remain a key emission in the medium term, the Bank is actively working to minimise emissions by taking steps to optimise gas consumption and exploring options for decarbonising its heating systems in the longer term.

The Bank remains on track to meet its 2030 target to reduce absolute greenhouse gas emissions by 63% from 2016 to 2030. 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.

The Bank is exploring its strategy to reduce the emissions from its physical operations to net zero by 2050 at the latest, and aims to publish its net-zero transition plan for its physical operations as part of next year’s climate disclosure. This net-zero strategy will cover the full scope of the Bank’s physical operations and is consistent with the target in the Climate Change Act 2008.

1: Approach to climate disclosure

Climate change and the transition to net-zero emissions present both risks and opportunities for individual institutions and the wider economy and financial system. The disclosure of these risks and opportunities is therefore essential for consumers, investors, businesses and policymakers to make better informed decisions, such as where to spend their money, how to manage their risks, and how to design effective climate policies.

The benefits of climate disclosures increase with the scale of their adoption. Consequently, the Bank has sought to promote global adoption of high-quality, comparable and comprehensive disclosures. In April 2019, the Bank decided to produce its own annual climate disclosure to improve transparency over how climate change was affecting its policy functions and operations. This is the Bank’s third annual climate disclosure and relates to the year ended 28 February 2022. In it, the Bank sets out its own approach to managing climate-related risks (climate risks) across its operations and in pursuit of its statutory objectives, as reflected in the Bank’s remit. The climate disclosure is published at the same time as the Bank’s Annual Report 2022.

The Bank has carefully considered its approach to climate disclosure as a central bank and set out some of its key design choices below:

Framework

The Bank continues voluntarily to seek to align with the structure and framework recommended by the Financial Stability Board’s (FSB’s) TCFD, as described below.^{footnote [2]} This is now the most commonly used framework by public companies and other organisations to disclose key climate-related information. Its recommendations provide a foundation to improve visibility of climate risks and opportunities, guided by four core elements: governance; strategy; risk management; and metrics and targets.

This climate disclosure 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 functions, including how the Bank uses metrics and targets to monitor and manage those risks. However, reflecting the fact that the TCFD recommendations aren’t tailored to central banks, the Bank exercises discretion in the way in which it interprets the recommendations in the context of its own climate disclosure. Annex 1 provides a summary of the way the TCFD recommendations have been reflected in this climate disclosure. The Bank has also factored in Network for Greening the Financial System (NGFS) guidance for central bank disclosure on financial operations, to which the Bank contributed.

The Bank is an official supporter of the TCFD recommendations and has a track record of supporting progress towards a global TCFD-aligned climate change disclosure standard.^{footnote [3]}

Building on the work of the TCFD, in November 2021 the IFRS set up the ISSB to establish consistent global sustainability disclosure standards. In March 2022, the ISSB published exposure drafts for ‘Climate-related Disclosures’ as well as ‘General Requirements for Disclosure of Sustainability-related Financial Information’, and are expected to publish a final global climate disclosure standard in 2022, which is expected to be based on the TCFD but will clarify climate disclosure requirements at a more granular level. The UK Government has announced that the ISSB standards will ‘form a core component of the UK Sustainability Disclosure Requirements^{footnote [4]} (SDR) framework and the backbone of its corporate reporting element’. The Bank welcomes the increased clarity that the new standards will bring and will review the standards as they develop to consider how they might inform the contents of future Bank climate disclosures.

Scope

As a public body, the Bank recognises the need to be transparent and as comprehensive as possible in disclosing the potential impacts of climate risks across its policy functions (monetary policy, financial stability policy, and prudential regulation) and operations (financial asset holdings and physical operations).This section sets out some of the main scoping decisions taken in relation to this climate disclosure.

The Bank was the first central bank to include analysis of the climate risks in financial portfolios held for monetary policy purposes in its climate disclosure. Specifically, the climate disclosure scope covers the Bank’s Asset Purchase Facility (APF) as well as the Bank’s own securities holdings for both policy implementation and funding the Bank’s policy functions (which are classified as Scope 3 emissions under the Greenhouse Gas (GHG) Protocol).

Figure 1.1: An indicative illustration of the scope of the Bank’s climate disclosure 2022 with reference to the four TCFD pillars

Footnotes

• Source: Bank of England.

As Figure 1.1 illustrates, in three of the four TCFD core elements (governance, strategy and risk management) the scope of this climate disclosure includes all areas of the Bank’s work. Decisions have been taken to limit the scope of the ‘targets and metrics’ element for reasons of practicality and utility. The key scope limitations have been set out below:

• The analysis of key climate risks to the Bank’s physical operations captures Scope 1 emissions (use of natural gas, fuel and refrigerants), Scope 2 emissions (electricity) and travel emissions (which are classified as Scope 3) using the GHG Protocol. Certain Scope 3 emissions from physical operations (emissions associated with the Bank’s supply chain) are currently out of scope due challenges related to data availability. However, the Bank is part-way through a multi-year project working with the Bank’s most carbon intensive and sophisticated suppliers to capture their Scope 3 emissions. The project is due to complete in early 2024 and will help to inform the Bank’s climate disclosure to be published in June 2024. The Bank expects to publish details of how this work will be broadened to include the Bank’s smaller suppliers in the Bank’s forthcoming strategy for reaching net-zero emissions in its physical operations, which is discussed in section 4.
• As in prior years, the financial operations analysis covers all long-term corporate and sovereign bond assets, including those held within the APF to implement monetary policy. It excludes: short tenor traded assets (given the very limited link between such assets and the incentives to effect lasting climate change); Bank purchases of commercial paper (CP) on behalf of HM Treasury between March 2020 and March 2021 as part of the Covid Corporate Financing Facility (CCFF) – all of which was under 12 months maturity, closed to new purchases on 23 March 2021, and had fully unwound by March 2022;^{footnote [5]} and the Bank of England Alternative Liquidity Facility (BEALF), which accounts for only 0.008% of the Bank’s overall balance sheet, and holds only supranational assets, the climate risk evaluation of which remains under development.
• Although the Bank’s pension fund is operationally independent from the Bank of England, for completeness it was included in the Bank’s financial operations climate disclosure in previous years. However, in line with new disclosure requirements from The Pension Regulator,^{footnote [6]} from this year the Bank’s pension fund will publish its own climate disclosure and therefore the portfolio is no longer included in this climate disclosure.

2: Governance

The Bank’s organisation-wide governance framework has been designed to be appropriate to the nature, scale and complexity of its operations. As a source of risk integral to the Bank’s mission, functions and operations, climate-related considerations are embedded in our approach to governance. This section sets out how the governance of the Bank’s climate-related work is applied.

Court of Directors’ oversight of the Bank’s management of climate-related risks

The Bank’s management of climate risks is overseen by its Court of Directors (Court). Their role is supported by established responsibilities for climate matters, which have been allocated across the Bank’s executive committees, steering groups, and management team. Decisions are supported by regular management reporting on climate strategy, risk management, metrics and targets.

Acting as a unitary board, Court 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 (ARCO), 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 ARCO oversee the Bank’s approach to climate risk management and climate disclosure. 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.

The executive-level committees are the most senior executive policy-making bodies beneath Court. They review and approve the Bank’s climate strategy at least once a year.

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 provides remit and recommendations letters to the Bank’s policy committees. In recent years these have been updated to include, among other things, the UK Government’s economic strategy for a ‘transition to an environmentally sustainable and resilient net-zero economy’.^{footnote [7]} And this year the Bank received two additional climate-related recommendations, one for each of the FPC and PRC, requiring the committees to ‘…have regard to the Government’s energy security strategy and the important role that the financial system will play in supporting the UK’s energy security – including through investment in transitional hydrocarbons like gas – as part of the UK’s pathway to net zero’. The Bank’s climate strategy takes account of the policy committees’ remit and recommendations letters, as described in section 3 and Annex 2.

Our climate work has featured in discussions across the Bank’s policy committees, executive committees, and at ARCO and Court.

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) (g)}

Footnotes

• Source: Bank of England.
• (a) While reserving certain key decisions to itself, Court 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-level committees.
• (b) Ben Stimson is Chief Operating Officer and Executive Sponsor for climate change across the Bank of England’s internal operations. Ben jointly signs off the Bank’s climate disclosure, together with Sarah Breeden and Afua Kyei.
• (c) Sarah Breeden is Executive Director of Financial Stability Strategy and Risk, and Executive Sponsor for climate change across the Bank of England’s policy functions. Sarah is also holds the Bank’s Senior Manager Function responsible for the financial risks from climate change. Sarah jointly signs off the Bank’s climate disclosure, together with Ben Stimson and Afua Kyei.
• (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) Afua Kyei is the Bank’s Chief Financial Officer and is responsible for the Bank’s Annual Report. Afua jointly signs off the Bank’s climate disclosure, together with Ben Stimson and Sarah Breeden.
• (f) ARCO is a sub-committee of Court.
• (g) The Executive Directors’ Climate Steering Group (EDCSG) is a cross-Bank steering group to facilitate discussions on climate-related work. The EDCSG can make recommendations to, and review papers prior to going to, the Bank’s executive-level committees, ARCO, and other Bank committees where relevant. The EDCSG is not a formal Bank committee or decision-making body.

Management’s role in assessing and managing climate-related risks

Governance of the Bank’s climate-related work at a management level is led by the Bank’s two Executive Sponsors for climate change: the Executive Sponsor for the Bank’s policy functions (Sarah Breeden, Executive Director for Financial Stability Strategy and Risk); and the Bank’s Executive Sponsor for climate change across the Bank’s internal operations (Ben Stimson, the Bank’s Chief Operating Officer). The Executive Sponsors work closely together in order to deliver the Bank’s climate work.

Sarah Breeden has also been allocated the Senior Management Function^{footnote [8]} (SMF) responsible for the financial risks from climate change, and is therefore responsible for recommending the Bank’s climate change strategy to the executive Committees, overseeing its execution, and co-ordinating climate-related work across the Bank. Ben Stimson has responsibilities for climate risks to the Bank’s internal operations.

The primary management forum responsible for effective co-ordination on climate-related work across the Bank is the Executive Directors’ Climate Steering Group, which is chaired by Sarah Breeden as the SMF holder. This group acts as a forum for Executive Directors across the Bank to discuss strategic climate-related issues and has been active in supporting Court and the Bank’s executive and policy committees in their work on climate change.

To embed consideration of climate change across the Bank’s functions, it operates a ‘hub and spoke’ model. At the centre sits the Climate Hub, a dedicated division of climate specialists, which supports the SMF and implementation of the Bank’s climate strategy across the organisation. Each area of the Bank, or spoke, has one or more climate leads responsible for directing climate-related work within their area, and co-ordinating with the Climate Hub and across other spokes. This balances development of climate expertise with embedding consideration of climate risk across the Bank.

3: Strategy

The Bank’s approach to climate change

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 the Bank’s 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 the Bank regulates, the stability of the wider financial system, and the economic outlook.^{footnote [9]} Since the publication of the Bank’s previous climate disclosure, the Bank has agreed seven strategic priorities for 2021 to 2024. These are detailed in the Bank’s Annual Report and include climate change (strategic priority 5).

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

‘Play a leading role, through the Bank’s 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.’

The Bank builds this resilience and supports the transition by ensuring that climate-related financial risks are proactively identified and effectively managed through its policy functions (eg its supervision of banks and insurers) and the Bank’s management of its own operations (eg the carbon footprint of its buildings).

The importance of the Bank’s work in this area is also reflected in the remits and recommendations that HM Treasury provides to the Bank’s three policy committees – the Monetary Policy Committee, the Financial Policy Committee, and the Prudential Regulation Committee. Each policy committee has a different set of responsibilities. Collectively, they discharge the Bank’s statutory functions in relation to monetary policy, financial stability and prudential regulation. For further information on the Bank’s policy committees, the remit setting process, and a summary of the climate-related elements of the committees’ remits, please see Table A2.1 in Annex 2.

The Bank’s work to meet its strategic goals

This year the Bank has refreshed the individual priorities that underpin its climate strategy to reflect the progress the Bank has made and broader shifts in the domestic and international climate agenda. The Bank has articulated its climate strategy as playing its part across five key 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. This was followed by guidance and industry-wide feedback for firms, including the PRAs expectations that firms hold adequate capital for climate-related financial risks. The PRA set a deadline for firms to embed the supervisory expectations as far as possible by the end of 2021. In addition, the PRA worked with the Financial Conduct Authority (FCA) to co-convene the Climate Financial Risk Forum (CFRF), an industry group established to share best practice on climate issues and accelerate firms’ capabilities to address climate change. The CFRF published a series of climate-related practical guides and toolkits in 2020 and 2021.

In October 2021, the PRA published a report on its assessment of progress firms had made on its supervisory expectations, how its supervisory approach would evolve going forwards, and initial findings on the relationship between climate change and regulatory capital requirements for banks and insurers.

The report found that firms had made good progress in some areas such as incorporating climate risks into governance frameworks, but overall there was still much further to go. Data gaps and modelling complexities continue to be cited as common challenges, but alternatives such as use of proxy data, expert judgement and assumptions can help bridge the gaps in the interim.

The report noted that the PRA’s supervisory approach would evolve from the end of 2021 with the PRA shifting gears from assessing implementation of its supervisory expectations to actively supervising against them. Firms should expect to demonstrate effective management of climate-related financial risks through regular supervisory engagements and reviews. Where progress is insufficient and assurance or remediation is needed, the PRA will request clear plans and, where appropriate, take action in response.^{footnote [12]}

The report found that regulatory capital for banks and insurers could be used to support resilience against the financial consequences of climate change, but not to address the underlying causes of climate change. The latter requires reducing GHG emissions across the wider economy and is a role for the UK Government, which will be driven by UK Government policy and the actions of industry and individuals. The Bank and PRA will undertake further work in 2022 to explore whether changes need to be made to the design, use, or calibration of the regulatory capital framework. To support this, the Bank has put out a call for research and will be hosting a climate change capital requirements research conference in October 2022. The Bank and PRA intend to publish an update of their views on this topic by 31 December 2022. In addition, during 2022 the PRA will review firms’ own assessments of their climate-related capital needs in banks’ Individual Capital Adequacy Assessment Plans and insurers’ Own Risk and Solvency Assessments.

The Bank has also undertaken work to explore the macroprudential risks from climate change. For example, the Bank recently concluded its Climate Biennial Exploratory Scenario (CBES) exercise and published the results on 24 May 2022. The exercise was designed 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 results of the exercise found that an ‘early action’ scenario, where policies are introduced in a timely manner to deliver an orderly transition to net zero by 2050, resulted in the lowest costs and greatest opportunities for the financial sector. Other scenarios where climate risks are higher bring greater costs for the financial sector and greater potential costs for the real economy, including through the withdrawal or increase in price of financial services to certain businesses and households.

There is also increasing awareness of the potential for changes in the environment beyond those directly attributable to climate change to create financial risks. Central banks and supervisors around the world have begun to explore these ‘nature-related financial risks’ such as biodiversity loss. The Bank is undertaking work in this area to establish the potential materiality of these risks and the transmission channels through which they might arise. This work draws on existing literature, such as ‘The Economics of Biodiversity: The Dasgupta Review’, and international work by the NGFS and other bodies. The Bank’s work in this space supports its contribution to the requirements in the Environment Act 2021 for public bodies to consider how they can support conservation and biodiversity.

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

The Bank’s role in the transition is to understand how different transition pathways could affect the macroeconomy, the stability of the wider financial system, and the safety and soundness of the firms it regulates. The Bank’s policy response will be calibrated to address the risks that these pathways pose to its objectives, but its actions cannot direct the pathway the economy or financial system ultimately faces.

The primary levers for driving an orderly economy-wide transition to net-zero emissions rest with UK Government in setting climate policy. Clarity over the future path of climate policy and implications for different sectors will better allow the UK economy to adjust effectively, and the financial system to support that adjustment, reducing the risks of a later, sharper, and more disorderly transition. However, the Bank’s actions can in some circumstances help magnify the effects of UK Government climate policy, not least since a resilient financial system will be better able to support the transition.

Over the past four years the Bank has chaired the Macrofinancial workstream of the NGFS, which has worked with a consortium of climate scientists and modellers to develop climate scenarios. These scenarios have been used by central banks and policymakers around the world in climate scenario exercises (like the CBES) and for a wider range of analysis.^{footnote [13]} Scenario analysis is a critical tool to help navigate the uncertainty associated with climate-related physical, policy, and macroeconomic models that look decades into the future, by enabling assessment against a range of possible outcomes. 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. In 2022, the Bank’s tenure as chair of the Macrofinancial workstream will end, but it will continue to play an active role in the future development of climate scenarios.

Improving understanding of the macroeconomic effects of climate change, including under different transition pathways to net-zero emissions, will be a key area of focus for the Bank going forwards. This is a relatively unexplored area with limited research to date. The Bank will undertake analysis to explore the size of the impacts, the transmission channels, and the potential implications for monetary and macroprudential policy. The Bank’s policy response will be calibrated to address the risks that these pathways pose to its objectives, in accordance with its remit. The Bank’s actions aim to support an orderly transition to net zero as a key component of the Bank’s work to maintain financial stability.

The Bank anticipates that individual and sector-level transition plans will assist its role as both a central bank and a financial regulator to identify the risks to firms and insurance policyholders and at the macro-level the systemic risks that may impact the economy as a result of transition. To that end the Bank is also an observer on HM Treasury’s recently established Transition Plan Taskforce (TPT). The TPT will help to define the standards for transition plans by establishing robust criteria and the effective use of science-based targets.

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, convened an industry working group to facilitate investment in productive finance. While this work has been 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 working group published its first report in September 2021. The impact on sustainable investment will be kept under review as the working group progresses.

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

The Bank has supported the adoption of the climate disclosure framework established by the TCFD since its inception, including recent guidance for central banks published by the NGFS.^{footnote [14]} The information in these climate disclosures needs to be consistent, comparable and comprehensive to be useful. Climate 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.

The Bank is working with the UK Government and other financial regulators to support the rollout of mandatory TCFD-aligned climate disclosure requirements across the economy by 2025.^{footnote [15]} 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 climate disclosures, and where material in their Pillar 3 regulatory disclosures. The wider rollout of climate disclosure requirements is being delivered through a combination of regulations and legislation, as described in the UK SDR.

Climate risks are global and therefore the coherence and consistency of climate 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 establishment of the IFRS Foundation’s ISSB, which published its initial exposure draft of a comprehensive global baseline of sustainability-related disclosure standards on 31 March 2022.

The Bank is also supportive of the development of robust forward-looking metrics which take into account the future emissions associated with companies’ activities. The Bank is engaging with a number of external stakeholders developing forward-looking metrics and associated frameworks.

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

The consequences of climate change are global and so the effectiveness of climate policy and the need for a robust understanding of climate risks, are not solely domestic concerns. They must be delivered in a co-ordinated and timely fashion at an international level. The Bank supports this through its work with other central banks, through its roles in international fora, and by working with UK Government to deliver progress on climate through the G7, G20 and via the twenty-sixth session of the Conference of the Parties (COP26).

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 2022, membership has grown to 114 members and 18 observers representing countries responsible for around 85% of global GHG emissions and responsible for supervising 100% of globally systemic banks. 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. In future the Bank will be chairing the NGFS Workstream 3, which will be considering the formation of monetary policy in relation to climate change. 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 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.

In addition to these climate-focused fora, the Bank continues to engage in the climate-related workstreams of standard setters and international bodies. The Bank is participating in the Basel Committee on Banking Supervision's (BCBS) Task Force on Climate-related Financial Risks (TCFR), contributing to enhancing global stability. The TCFR is undertaking work on identifying the gaps within the Basel framework and potential measures to better capture climate related financial risks, including regulatory, supervisory and disclosure elements. It is also a key forum through which the Bank will advance discussions internationally on its research into the relationship between climate change and regulatory capital requirements. In addition to a stocktake and analytical reports published last year, the BCBS recently published on new ‘Principles to effectively manage and supervise climate related financial risks’. Progress in implementing and embedding the Principles will be monitored by the BCBS. The Bank is also participating in the IAIS Climate Risk Steering Group to support insurance supervisors in developing their own scenario analysis, to integrate data collection, and to explore climate-related amendments to the Insurance Common Principles. Victoria Saporta, Executive Director of Prudential Policy at the Bank, is chair of the IAIS.

The FSB’s Standing Committee on Supervisory and Regulatory Cooperation, chaired by the Governor, has recently published a report providing recommendations to help regulatory authorities identify relevant and useful climate-related data through supervisory and regulatory data collection. Through the G20 Sustainable Finance Working Group the Bank is helping to develop a transition finance framework that will set out high-level principles for authorities to enable financial flows to support the transition and help firms formulate consistent and credible transition plans. And via the Organisation for Economic Co-operation and Development the Bank is contributing to high-level principles for climate transition-relevant finance.

The Bank has also worked to ensure consistency and comparability in climate disclosure frameworks, initially through a report to the G20 last year promoting climate-related disclosures, and subsequently in its support for the IFRS’s ISSB and its draft standards.

(5) Demonstrating best practice through the Bank’s own operations

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

For the Bank’s financial operations, in November 2021 the Bank published a comprehensive framework to green the Corporate Bond Purchase Scheme (CBPS) portfolio. The ultimate objective was to incentivise economy-wide transition and take into account the climate impact of issuers. A programme of reinvestment operations based on the new framework was completed between November 2021 and January 2022. Subsequently, the MPC announced in February 2022 the Bank would be reducing the stock of sterling corporate bonds through a programme of bond sales to be completed no earlier than towards the end of 2023 or in early 2024, subject to market conditions. While the corporate holdings are to be unwound, the Bank’s framework, on which the subsequent reinvestments were based, supports climate transition by providing an example for other investors in the public and private sectors of how to green a corporate bond portfolio.

4: Risk management, metrics and targets

Risk management

The Bank has a risk management framework that spans all of the Bank’s functions. The Risk Management Framework specifies the Bank’s risk tolerance and provides an approach for managing both financial and non-financial risks within tolerance. It is underpinned by an internal classification of risk types (a risk taxonomy), which all areas of the Bank use to categorise their risks.

Within the risk taxonomy, the Bank identifies a small number of risk types (Key Risk Types), which are overseen by a named ‘Risk Custodian’. The Risk Custodian for climate change risk is Sarah Breeden, one of the Bank’s Executive Sponsors for climate change and SMF responsible for the financial risks from climate change. Risk Custodians, supported by the Bank’s second line risk function, are responsible for defining a set of risk metrics and tolerances; monitoring and reporting them and, where appropriate, co-ordinating the timing and implementation of mitigants. Development of the Bank’s climate change metrics drew on expertise across the Bank, aiming to capture the full range of climate risks to which the Bank is exposed. The metrics will be refreshed periodically, reflecting the pace of development in the field and frequency of reporting of underlying data.

The Bank uses its risk management framework to monitor exposure to climate change and how it could impact the resilience of its financial and physical operations. To help analyse climate risk in both these areas, the Bank focuses on two climate-related risk drivers:

• Transition risks arise from the changes required to move towards a net-zero economy. Changes in policy, technology, shifting consumer and societal sentiment, and interpretations of the law could prompt a reassessment of the value of a large range of emissions intensive assets.
• Physical risks arise from changes in the earth’s climate. These changes can be acute (eg increased severity or frequency of extreme weather events such as floods and wildfires) or chronic (eg rise in sea levels over the medium to long term). 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. Without counter-balancing factors, all of these outcomes reduce asset values, resulting in lower profitability for companies, damaging public finances, and increasing the cost of settling underwriting losses for insurers. Indirect effects on the macroeconomic environment, such as lower output and productivity, exacerbate these direct impacts.

The Bank’s approach to risk management is influenced by three distinct characteristics, which the Bank sees in both transition and physical climate risks, 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 and society, 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, financial firms, businesses, and households.

While these three characteristics mean that climate risks present unique measurement and management challenges, the Bank recognises that delay in taking action will impair its ability to both measure the risks the Bank is taking in the short term and assess the long-term consequences of those decisions. As such, the Bank is taking a forward-looking approach to climate risk management and is prioritising development of the necessary skills and knowledge to tackle risks as they develop.

The process for managing risks related to climate change will continue to develop as the Bank’s understanding of underlying risks improves, technical capabilities are enhanced, and methodologies evolve and become more standardised. Several developments have been implemented since last year:

• In 2021, the Bank reported that critical metrics for climate change risk were in development. Following approval by ARCO in June 2021, these metrics have since been reported regularly to the Bank’s executive and non-executive risk committees, and periodically to Court.
• Specific guidance has been created to assist business areas with assessing and reporting climate change risks. The aim of this guidance is to encourage more comprehensive thinking about the impact of climate change risk and to foster increased consistency of reported risks.

The remainder of this section 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 a much smaller degree – and funding its wider activities (Figure 4.1). This involves purchasing sovereign and corporate assets and offering secured lending to counterparties through the Bank’s facilities. As part of managing the financial risks involved in this, the Bank conducts credit risk assessments and manages a wide range of collateral.

Figure 4.1: The Bank’s policy and balance sheet tools ^{(a) (b) (}c^{) (}d⁾

Footnotes

• Source: Bank of England.
• (a) This diagram excludes the CCFF. All CP held by Covid Corporate Financing Facility Limited (CCFFL) was of less than 12 months maturity and the scheme officially closed on 18 March 2022.
• (b) In this context ‘SMF’ refers to the Sterling Monetary Framework, and ‘SSAs’ refers to bonds issued by sovereigns, supranationals and agencies.
• (c) This figure excludes the Term Funding Scheme with additional incentives for SMEs (closed to new drawings) and the short-term non-sterling liquidity facilities, including the Liquidity Facility in Euros (currently inactive) and US Dollar Repo.
• (d) The full range of the Bank’s policy and balance sheet tools are set out in the Bank of England Market Operations Guide.

The Bank has taken a number of steps to incorporate climate risks into its financial risk management processes. A schematic showing the sequencing of the Bank’s programme of internal climate risk integration initiatives is outlined in Figure 4.2, where the Bank’s current performance is indicated by the row labelled ‘2021/22’.

The Bank has enhanced its collection of climate-related risk data (for example, emissions intensity) and has made initial updates to its credit risk assessment methodologies for each of the asset classes the Bank is directly exposed to through its market operations (corporate, sovereign and financial institution). For each of these asset classes the Bank has a framework for identifying climate risks and, where appropriate, incorporating relevant metrics into its risk assessment templates.

Figure 4.2: Sequencing of climate risk management initiatives across the Bank’s financial operations

Footnotes

• Source: Bank of England.

As an example of the Bank’s approach, Figure 4.3 outlines the framework used to identify climate-related credit risks to the Bank’s sovereign asset exposures. These indicators can be used to adjust the Bank’s internal credit ratings when risks are identified that could have an impact over the relevant investment horizon. The Bank draws heavily on the indicators included in the metrics section of this climate disclosure (for example, carbon intensity and natural resource rents metrics are used to assess transition risks to sovereign assets).

Figure 4.3: Illustrative schematic for identifying sovereign climate risks

Footnotes

• Source: Bank of England.

Similar approaches are being developed and adopted for the Bank’s exposures to financial counterparties and corporate assets. In the case of financial counterparties, the assessment methodology seeks to incorporate climate risks by identifying loan concentrations to sectors that face higher transition risks and geographies exposed to greater physical risks. It also assesses banks’ long-term business strategies, as firms’ exposures to climate risks will need to be managed through a combination of appropriate risk mitigation measures and business model adjustments. Box B explains the Bank’s approach so far to integrating climate into the risk management approach for the collateral prepositioned by the Bank’s financial counterparties who use its policy tools.

In the case of corporate assets, the methodology initially assesses the impacts of transition risks on firms’ business models, product demand, operating costs and funding risks. It draws on metrics that are used to assess the transition risks of its sterling corporate assets, as well as from the Bank’s approach to greening the CBPS (described further in Box E).

These processes form the Bank’s approach to identifying, assessing, monitoring and managing the Bank’s exposures to a range of climate-related financial risks on its financial asset portfolios. However, climate-related financial risk management remains a rapidly developing field, and these initial approaches will be refined as data and methodologies develop. Furthermore, the Bank will continue to deepen the range of forward-looking scenario-based analyses that it carries out on its balance sheet. In due course, the Bank will also explore the extent to which the results from the CBES can inform its climate risk management approach.

Box B: Climate risks facing residential mortgage collateral prepositioned at the Bank

The Bank accepts a wide range of collateral^{footnote [16]} to manage the financial risks it is exposed to as a result of deploying its policy tools. This includes pools of residential mortgage loans. Before the Bank accepts these loan pools as collateral, it conducts due diligence to ensure it is satisfied with the security offered.

Like other financial asset types, residential mortgages are exposed to climate risks. The Bank is taking steps to capture the information required to enable it to understand, analyse and quantify these risks, and to consider how to manage the impact on the value of collateral prepositioned.

Property values are subject to transition risks, for example costs associated with changes to energy efficiency policies. The UK Government has a goal of upgrading as many properties as possible to an Energy Performance Certificate (EPC) rating of C by 2035 to reduce current emissions from housing.^{footnote [17]} It has already started putting in place policies to achieve this – such as restricting the sale or letting of properties below a certain level of energy efficiency. To the extent that such policies have differential effects on the valuations of more and less energy-inefficient properties, this could affect the Bank’s risk exposure via changes in loan to value ratios and potential loss given default on the loans prepositioned with us as collateral.

In addition, some Bank research suggests that mortgages on higher energy-efficient properties (those with EPC ratings of A, B or C) are around 18% less likely to be in arrears than mortgages on energy-inefficient properties (ie those with EPC ratings E, F or G), independent of household income.^{footnote [18]} Such results could suggest a greater probability of default (PD) associated with lower energy-efficiency properties.

In order to understand the impact of energy efficiency policies further, the Bank needs to gather better data on the energy efficiency of the properties prepositioned as collateral to it. As a result, the Bank has recently started asking counterparties prepositioning residential loan collateral to submit additional information on energy efficiency in the Bank’s loan level data templates. The Bank will use these data to assess the impact of energy efficiency on collateral values, and to consider whether adjustments to collateral haircuts might be required in the future.

Properties are also exposed to physical climate risks. For example, flood damage can cause significant losses for homeowners, reducing their ability to repay loans and/or reducing the value of their properties.^{footnote [19]} In the UK, flood insurance is usually covered by home insurance policies. However, if homeowners fail to renew their policies or insurers are not able to provide cover for a large number of locations, this may leave homeowners fully exposed to flood risk, potentially increasing both the PD and the loss given default on their mortgages. Even where there is good insurance coverage, an increased actual or perceived risk of flooding could affect property prices through perceptions of potential inconvenience and/or increased insurance premiums. Specific scenarios relating to energy efficiency policy and of flooding risk were part of the CBES. The results from that suggest mortgage losses could be highest in the ‘No Additional Action’ scenario, and that these losses are unsurprisingly likely to be geographically concentrated in those areas most heavily impacted by flooding.^{footnote [20]}

Chart 4.1 provides a stylised representation of a subset of the Bank’s collateral holdings (as indicated by the orange dots) that are in areas identified as being high flood risk (shaded in aqua) using the Environment Agency’s flood risk data for England and Wales. Not all collateral in these areas is exposed to flood risk, but this data mapping exercise provides a useful starting point for further analysis. The Bank has started looking at these data, also informed by banks’ responses to its collateral Due Diligence Questionnaires, to help identify prepositioned collateral that could be more exposed to flood related risks.

Chart 4.1: Relative flood risk in the Bank’s prepositioned residential mortgage collateral ^{(a) (b) (c)}

Footnotes

• Source: Bank of England.
• (a) Chart 4.1 uses UK Government Environmental Agency flood risk data set for England and Wales. Flood risk zones (aqua shading) represent the regions with the 20% highest relative flood risk probabilities.
• (b) Collateral holdings (orange circles) are calculated based on the total market value of prepositioned residential mortgage collateral by participants as at 28 February 2022. The size of the circles broadly indicates the amount of collateral holdings in each region.
• (c) The chart excludes residential mortgage collateral prepositioned in regions that are not identified as being at high risk of flooding.

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).

As in previous years, by far the largest proportion (98%) of the Bank’s financial assets 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. Sterling UK Government bonds (gilts) represent 98% of that portfolio. The remaining 2% is currently invested in sterling corporate bonds as part of the CBPS. Asset holdings in the APF increased materially further in 2021, reflecting the policy response to Covid, while, in February this year, in response to the changing economic outlook, the MPC announced that it would begin to run down the stock of assets in the APF. As a result, the CBPS will be unwound through a programme of corporate bond sales to be completed, subject to market conditions, at the end of 2023 or in early 2024.^{footnote [21]}

As in previous years, the analysis in this climate disclosure covers assets that have a maturity of more than 12 months.^{footnote [22]} In contrast to previous years, climate disclosure related to the Bank’s staff pension fund is being reported separately, in line with new reporting requirements for UK Pension Funds.^{footnote [23]}

The analysis in this section is based on the assets holdings reported in the Bank’s Annual Report and Accounts as at end-February 2022. Because most of the climate data associated with those holdings are only available with a time lag, the analysis uses the Bank’s holdings as at end-February 2022 but associated emissions data primarily from 2020 or earlier. Impacts from reductions in emissions associated with the Covid lockdown restrictions in 2020 are now feeding into data on the corporate bond portfolio (Box C).

The metrics in this section draw on published data and on data and methodologies from external data providers used by the Bank. The Bank continues to monitor developments in climate risk data and methodologies in order to adapt its approach in line with emerging best practice (Box D).

Box D: Improvements to the Bank’s climate disclosure in line with emerging best practice

In October 2021, the TCFD updated its implementation guidance and released more detailed, supplementary guidance on climate metrics and targets. The Bank has updated its climate disclosure in several areas to align with the latest guidance.

Financed emissions for the Bank’s corporate holdings

‘Financed emissions’ measures seek to estimate the amount of emissions that can be ascribed to an investor, based on how much of a company’s financing that investor provides. This metric therefore links assets to their actual contribution to climate change (in absolute emissions terms). In doing so, year on year portfolio emissions reductions can be linked to the real world emissions reductions required to be consistent with net zero (scientific estimates suggest this is around 7% a year).

The TCFD recommends using the methodology developed by the Partnership for Carbon Accounting Financials (PCAF). Therefore, the Bank reports the financed emissions for its corporate holdings using the PCAF standard^{footnote [25]} set out in Figure 4.4.

Figure 4.4: The PCAF standard for reporting financed emissions ^{(a), (b), (c)}

Footnotes

• Source: PCAF.
• (a) Company emissions is calculated as absolute Scope 1 and 2 emissions for all financial and non-financial companies. Absolute Scope 3 emissions is also disclosed for energy (oil and gas) and mining companies (with specific NACE codes L2: 05-09, 19, 20), in line with the PCAF standard.
• (b) Outstanding amount is the market value of corporate debt (for CBPS).
• (c) For all listed companies, company value is Enterprise Value including cash of the respective company. For private companies, this is the sum of total company equity and debt.

Exposure to ‘carbon-related’ assets

For the corporate portfolio, the Bank has included a new metric measuring the percentage of ‘carbon-related’ assets in the portfolio. To calculate this, the Bank uses the United Nations Environment Programme Finance Initiative’s (UNEP FI) Net-Zero Asset Owner Alliance Target Setting Protocol guidance to identify companies with high-carbon activities. While this metric does not consider companies’ actions to mitigate transition risks, it provides a useful baseline assessment of transition risk exposure in the Bank’s portfolio.

Scenario analysis

The new guidance also places a greater emphasis on forward-looking metrics in climate disclosures, including the use of scenario analyses and measures of the alignment of financial portfolios with climate goals. This year, the Bank presents revised estimates incorporating updated climate scenarios issued by the NGFS. These scenarios reflect changes in climate policy since 2018, including updated net-zero commitments by countries, and have greater sectoral and regional granularity than alternative sources, providing a foundation for more detailed analysis based on the most up to date scientific research.^{footnote [26]}

Implied Temperature Rise

The methodology underpinning the Implied Temperature Rise (ITR) metric reported for the CBPS has also been revised in line with the publication of best practice Portfolio Alignment Team guidance released ahead of COP26. This technical report represents a significant step forward in determining a consistent and robust approach to portfolio alignment tools, with the aim that these tools are more widely adopted and the results easier to compare across portfolios.

A key improvement from the previous approach is the way to aggregate the company-level results to portfolio level. This now follows what is known as an ‘aggregated-budget’ approach (previously, the Bank’s portfolio temperature represented a weighted average of the individual company temperature scores).

Under this revised approach – considered by guidance to be the most scientifically robust – each company’s predicted emissions performance is compared to a Paris-aligned carbon budget, based on its country and sector of operations. (This estimate incorporates all emissions scopes and, importantly, assumes companies meet their disclosed emissions reductions targets.) An ‘overshoot’ or ‘undershoot’ of emissions for each company is calculated, based on its predicted performance relative to its assigned budget, and is allocated to the investor in proportion to the amount of ‘financing’ that investor provides to the company. As with the financed emissions metric, this aims to capture the investor’s actual contribution to climate change in terms of emissions it is ‘responsible for’ through its investment activities. The absolute over or undershoot for all companies in the portfolio is aggregated and compared with a Paris-aligned budget to determine the overall portfolio temperature.

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

Sovereign asset holdings

Carbon footprint

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

The TCFD’s recommended metric for assessing the carbon footprint of an asset portfolio is the Weighted Average Carbon Intensity (WACI). This calculates the carbon intensity of each asset (GHG emissions measured relative to gross domestic product (GDP) for sovereigns), weighted by their relative size in that portfolio. 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.

Consistent with last year, the Bank uses data from the UNFCCC and the World Bank. Metrics published in the Bank’s previous climate disclosures have been updated in this climate disclosure, if there have been revisions to historical data from these sources.

The WACI of the sovereign assets held by the APF has fallen from 218 to 208 tonnes of CO₂ equivalents per £mn GDP (tCO₂e/£mn GDP) year on year (Chart 4.2). These holdings are comprised entirely of gilts, and so the WACI reflects the carbon intensity of the UK sovereign.

Chart 4.2: WACI of the Bank’s sovereign bond 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, 2018 and 2019), World Bank GDP $ PPP (2017 constant prices, for 2017, 2018 and 2019) and Bank calculations.
• (a) Due to the lag in reporting of national carbon emissions, the emissions data for the 2020, 2021 and 2022 portfolios are from 2017, 2018 and 2019 respectively.
• (b) The G7 reference portfolio is calculated by weighting G7 countries according to the market value of debt outstanding at end-February 2022. Market value of debt data are from Bloomberg Finance L.P.
• (c) For reference, the reported 2020 and 2021 WACI metrics in last year’s climate disclosure were 229 and 222 tCO₂e/£mn GDP (APF Sovereign) and 262 and 261 tCO₂e/£mn GDP (Bank’s own securities holdings). These figures have been re-stated as the external source data used to calculate the metrics has been updated.
• (d) 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.

The WACI of the Bank's own securities holdings is a little higher, reflecting that just under 20% is invested in the debt of sovereigns with a higher carbon footprint than the UK. The WACI of those holdings has fallen to 251 compared with 257 a year ago, and remains materially lower than that of a comparable G7 reference portfolio.

Transition risk

In order to achieve national and international climate goals, countries and companies need to undertake significant changes to reduce global GHG emissions at a significantly faster rate than is occurring today. These changes to business models and economic conditions will result in transition risks to sovereign and corporate assets, as changes in policy, technology and consumer sentiment prompt a reassessment of asset values.

To assess the transition risk exposure in the Bank’s sovereign holdings, one metric the Bank monitors is countries’ fossil fuel exposures. If all proven fossil fuel reserves were to be consumed, it is estimated that the global emissions generated would far exceed the levels required to limit temperature warming to 1.5°C.^{footnote [27]} There is therefore an increasing likelihood that 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. Given the narrow range of sovereigns the Bank invests in, the Bank’s analysis suggests that its sovereign portfolios continue to face limited direct stranded asset risk.

According to the World Bank, total natural resource rents (the profit from extracting natural resources)^{footnote [28]} for both the APF holdings and the Bank's own securities holdings fell from 0.7% to 0.6% of GDP between February 2021 and 2022, measured on a weighted average basis. Of that, less than 0.02% is accounted for by coal rents.

Countries’ forward-looking climate policies

Assessing countries’ fossil fuel exposures (ie the profit from extracting natural resources) provides a useful point in time assessment of transition risks. However, transition risk extends well beyond traditional portfolio forecasting horizons and could entail substantial shifts in government policy. Therefore, the range of potential transition pathways the economy may take is both wide and highly uncertain.

To assess transition risks of sovereign portfolios on a forward-looking basis, the Bank has reviewed countries’ carbon emission reduction targets. Countries that have signed up to the Paris Agreement^{footnote [29]} are committed to setting short-term detailed emissions targets, which are known as Nationally Determined Contributions (NDCs). If a country’s target is not currently consistent with the Paris Agreement, then it may be more exposed to the risks associated with a disorderly transition (for example if it has to ramp up quickly its ambition in the future), which could have an impact on the values of its sovereign bonds at some horizon.

The emissions reductions targets to 2030, embedded in the NDCs of the sovereign issuers held in the Bank’s own securities holdings, are now consistent with a ‘below 2°C’ warming scenario – but are still not yet consistent with achieving the levels required to limit temperature warming to 1.5°C (Chart 4.3). Chart 4.3 compares countries’ targets, submitted ahead of COP26, with the estimates of the global emissions reductions required by 2030 to be consistent with 1.5°C warming (represented by the purple dots) and just below 2°C warming (represented by the orange dots). These estimates use the latest scenarios published by the NGFS in June 2021.^{footnote [30]}

Scientific estimates by the Intergovernmental Panel on Climate Change (IPCC) suggest that countries have to be ‘net zero’ by mid-century to limit temperature increases to 1.5°C.^{footnote [31]} Following COP26, all of the sovereign issuers in the Bank’s own securities holdings have publicly committed to reduce their emissions to net zero by 2050. Furthermore, the proportion of sovereign issuers in the Bank’s own securities holdings that have enshrined their 2050 net zero target in law has increased from 83% to 94% year on year.^{footnote [32]}

Chart 4.3: Committed 2030 emissions reductions targets (NDCs) of sovereigns in the Bank’s own securities holdings

Footnotes

• Sources: 2030 emissions reduction target data from Climate Action Tracker [Data Portal] © 2009–2022 by Climate Analytics and NewClimate Institute, accessed March 2022, all rights reserved; NGFS Scenarios Portal [REMIND-MAgPIE 2.1–4.2 model] accessed March 2022; Bank calculations.

Taken together, these measures show that sovereign issuers within the Bank’s own securities holdings have raised ambitions to reduce emissions. However, these forward-looking projections based on targets do not assess the countries’ planned policies to achieve them. Countries will need to implement significant policies to reduce emissions rapidly in line with these targets and to limit temperature increases in line with the Paris Agreement. How countries respond to this challenge directly affects the level of transition risk facing the Bank’s holdings.

In addition, while countries around the world are increasingly setting emissions reductions targets, an important part of climate risk analysis is to assess the potential risks if policies are implemented at different time horizons from those intended, or some are not implemented at all. This requires scenario analysis (as presented in Boxes G and H).

Physical risk

The financial and humanitarian costs of physical climate change are rising and are projected to increase substantially further over the coming decades. For example, the latest IPCC reports estimate that 50%–75% of the global population could be exposed to life-threatening climate conditions by 2100.^{footnote [33]}

The crystallisation 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, including for effective financial risk management. However, the assessment of physical climate risks remains a 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 forward-looking physical risk exposure in the Bank’s sovereign holdings presented in Chart 4.4 use a ‘scorecard’ approach developed by one of the external data providers used by the Bank. A range of indicators is used to score each country’s current and expected future physical risk exposures (as a proportion of GDP, population and agricultural land use) from 0 to 100, where 0 indicates the ‘lowest risk’ and 100 indicates ‘highest risk’. 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). The scores displayed in Chart 4.4 represent a percentile ranking – eg a score of 25 means that 25% of the other countries assessed by the data provider have lower scores across each weather event.

Using this methodology, the UK’s exposure to physical risk, relevant for the APF gilt portfolio, remained low relative to other countries in February 2022 (9th percentile), with no change year on year. Within the overall low score, the APF portfolio remains most exposed to sea level rise (55th percentile) and flood risk (32nd percentile).

The physical risk exposure of the Bank’s own sovereign securities holdings (~2% of total reported holdings) also remained low and unchanged year on year (16th percentile). This is considerably lower than that of a comparable G7 portfolio (47th percentile). It is driven by the portfolio mix and its lower exposure to certain types of extreme weather events such as heat stress, hurricanes, water stress and wildfires. Sea-level rise (55th percentile) and flood risk (32nd percentile) continue to represent the most material physical risks to the Bank’s own securities holdings and are also similar in magnitude to a comparable G7 portfolio.

Chart 4.4: Physical risks facing the Bank’s sovereign bond holdings ^{(a) (b)}

Footnotes

• Sources: Bloomberg Finance L.P., Moody’s Analytics and Bank calculations.
• (a) The G7 reference portfolio is calculated by weighting G7 countries according to the market value of debt outstanding at year end.
• (b) Market value of the debt data are from Bloomberg Finance L.P.

While this scorecard approach suggests physical risks in the Bank’s asset portfolios are relatively low on a near-term horizon, they could increase further over a longer time horizon as the physical impacts of climate change are estimated to intensify in the second half of this century, particularly if no additional policy action is taken. This scorecard analysis provides a useful first step in assessing the physical risks of the Bank’s sovereign holdings. However, the range of potential future pathways for physical risks is broad and uncertain – and heavily dependent on actions taken in the coming years.

Corporate bond purchase scheme

Carbon footprint

In November 2021, in line with HM Treasury’s update to the MPC’s remit in March 2021, the Bank published a comprehensive framework to greening its CBPS portfolio, with the ultimate objective of incentivising economy-wide transition (discussed further in Box E). Within this, the Bank announced an overall commitment to achieve net-zero GHGemissions associated with the CBPS portfolio by 2050. The Bank also set an interim target – to reduce the WACI of the portfolio by 25% by 2025 compared to 2020 (the Bank’s baseline year for measuring the target) – to support this goal in practice.

A programme of reinvestment operations^{footnote [34]} based on the new framework was completed between November 2021 and January 2022.

The figures presented in this climate disclosure are based on the Bank’s financial year end of February 2022 and so include purchases undertaken within that reinvestment round. As outlined in Box B, the carbon emissions data typically refer to data from corporates’ 2020 financial year.

Subsequently, the MPC announced in February 2022 that it will reduce the stock of holdings of sterling corporate bonds by a programme of bond sales to be completed no earlier than towards the end of 2023. While the Bank’s own corporate holdings will be unwound,^{footnote [35]} the framework the Bank published in November 2021, and on which its subsequent reinvestments were based, supports the climate transition by leading by example on greening a corporate bond portfolio.

The WACI of the CBPS decreased by 8% in the year to February 2022, and has fallen 18% since 2020 levels (the Bank’s baseline year for measuring the target) (Chart 4.5). The CBPS WACI as of February 2022 was 233 tonnes of CO₂ equivalents per £mn of revenue (tCO₂e/£mn), down from 253 tCO₂e/£mn in 2021.

Chart 4.5: WACI of the CBPS relative to 2020 baseline year ^{(a) (b)}

Footnotes

• Sources: Certain information 2022 © MSCI ESG Research LLC, reproduced by permission, companies’ annual filings and Bank Calculations.
• (a) The historical WACI for 2020 and 2021 has been restated from 276 and 251 tCO₂e/£mn respectively to account for improvements in data quality (eg moving from modelled emissions estimates to companies’ disclosed emissions, and due to company restatements).
• (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.

At a headline level, the decrease in portfolio emissions was driven by a combination of year on year improvements in real economy corporate emissions, Covid-related national lockdowns as well as the impact of the first tranche of reinvestments under the greening framework.

Chart 4.6: Average year on year change in absolute emissions by CBPS firms to 2022 by sector

Footnotes

• Sources: Certain information 2022 © MSCI ESG Research LLC, reproduced by permission, companies’ annual filings and Bank Calculations.

This reduction was achieved despite Covid actually resulting in an increase to the carbon intensities of some sectors. For example, in both the energy and industrial and transport sectors, Covid-19 effects meant firms experienced substantial emissions reductions (Chart 4.6). However, their carbon intensity increased, because of a larger relative decline in revenues, given national lockdowns (Chart 4.7). This effect was also experienced by hospitality firms in the consumer, cyclical sector, as well as consumer goods and pharmaceutical companies in the consumer, non-cyclical sector.

Chart 4.7: Weighted average sectoral carbon intensities of the CBPS

Footnotes

• Sources: Certain information 2022 © MSCI ESG Research LLC, reproduced by permission, companies’ annual filings and Bank Calculations.

As mentioned in Box D, this year, for the first time and in line with updated TCFD guidance, the Bank is reporting on the financed emissions of the CBPS. These measures seek to estimate the amount of emissions that can be ascribed to an investor based on how much of a company’s ‘financing’ that investor provides (where ‘financing’ is estimated by scaling the size of holdings to the company’s value).

This metric therefore links an asset to its actual contribution to climate change (in absolute emissions terms), and can be more directly linked to the real world emissions reductions required to be Paris-aligned. As outlined in Box D, the Bank has used the PCAF standard (as recommended by TCFD) to estimate the financed emissions of the Bank’s CBPS holdings (Chart 4.8). This measure considers Scope 1 and 2 emissions for all portfolio companies. Scope 3 emissions are only included for those sectors prescribed by the guidance – where Scope 3 emissions are seen as most relevant to firms’ business models (eg oil and gas, mining and some firms in the manufacturing sector) and where data availability is greatest. That currently reflects 4% of the Bank’s holdings by value. The requirement to report the Scope 3 emissions for other sectors is being phased in over time as data availability improves.

The financed emissions associated with the Bank’s CBPS holdings fell 16% in the year to February 2022, from 5.4 to 4.5 million tonnes of CO₂ equivalent (MtCO₂e) (Chart 4.8). This was driven by a decrease in the current market value of the portfolio, changes to companies’ enterprise values and decreases in the firms’ absolute emissions over the measurement period.

When looking only at the financed emissions associated with the Scope 1 and 2 activities of companies’, these reduced 25% year on year to 2.0 MtCO₂e. This reflects a 9% average reduction in companies’ absolute emissions between 2021 and 2022, with the remaining amount driven by changes in market values as explained above. Conversely, companies’ Scope 3 absolute emissions fell by only 2% on average. This likely reflects that it is easier to make incremental efficiency improvements to improve companies’ own operations (Scope 1 and 2) but slower and more challenging to shift energy-intensive products towards lower-carbon alternatives and to change consumer behaviours.

There are, however, some important limitations relating to the calculation of financed emissions:

• Firstly, similar to the WACI, fluctuations in financial market variables can have a large impact on reported financed emissions. For example, an estimate that seeks to remove the impact of market fluctuations suggests that total absolute financed emissions reduced by 9%: 13% for Scope 1 and 2 emissions and 6% for Scope 3 emissions. This measure better reflects the actual decarbonisation of firms in the portfolio.
• Secondly, as flagged by PCAF, financed emissions reporting does not allow for performance comparisons across portfolios as it is heavily influenced by changes to the size and make-up of asset portfolios.
• Finally, as with other carbon footprint metrics there is an element of double counting, particularly when reporting Scope 3 emissions, given that one company’s Scope 3 emissions is likely to be another’s Scope 1 and 2. Given that, Chart 4.8 separates financed emissions by scope. Despite covering only a small proportion of the portfolio, the Scope 3 financed emissions reported are similar in magnitude to the Scope 1 and 2 emissions for the entire portfolio, reflecting the importance of seeking to quantify these emissions as much as possible.

Chart 4.8: Financed emissions of the CBPS ^{(a) (b) (c)}

Footnotes

• Sources: Certain information 2022 © MSCI ESG Research LLC, reproduced by permission, Refinitiv Eikon, companies’ annual filings and Bank Calculations.
• (a) For private companies, company value (Enterprise Value Including Cash) is replaced by ‘total debt + equity’.
• (b) Company emissions are reported on a Scope 1 + 2 basis for all companies covered by this analysis (97% of the portfolio) and a Scope 3 basis for certain high-carbon activities (4% of the portfolio) as defined by PCAF. Companies are not covered (representing 3% portfolio) where GHG emissions data are unavailable.
• (c) The data quality score for this portfolio is calculated as 2 as defined by PCAF.

Forward-looking emissions performance against climate goals

ITR methodologies continue to be enhanced to reflect emerging guidance. This year, one of the data providers used – MSCI – has introduced a new version of its ITR metric, in order to meet as far as possible the recommendations outlined in the latest technical guidance. As discussed in Box D, a key improvement from the previous approach is the way to aggregate the company-level results to portfolio level, which now follows an ‘aggregated-budget’ approach that tries to ensure actual emissions associated with a portfolio are captured. Similar to last year, this estimate incorporates all emissions scopes and, importantly, assumes companies meet their disclosed emissions reductions targets.

Using the revised ITR methodology, the implied temperature rise of the CBPS for 2022 is 2.4°C. This is based on portfolio coverage of 84%, compared to 71% last year, reflecting greater data availability and coverage improvements by the data provider. The difference with the 3.0°C figure reported last year reflects almost entirely the improvements made to the methodology.

ITR metrics are a potentially useful way to assess portfolio alignment with broader forward-looking climate goals. But they remain highly sensitive to the underlying assumptions and despite significant improvements do not yet, by themselves provide a robust basis for assessing a portfolio’s climate credentials. When assessing the forward-looking performance of the CBPS, the Bank supplements them with additional measures such as whether emission reduction targets are subject to third party verification (Box F).

Box F: Forward-looking performance of the CBPS

The Science Based Targets Initiative (SBTi) sets out a methodology to develop decarbonisation targets in line with Paris-aligned emissions reductions requirements. SBTi verify targets set by companies and their methodology is widely used for corporate target setting. Assessing which companies have verified science-based targets, as defined by the SBTi methodology, provides a useful indication of firms’ commitment to improve their forward-looking climate performance and one means of assessing the portfolio’s alignment with climate goals. SBTi assesses firms’ targets against three categories: 1.5°C aligned, ‘well-below’ 2°C aligned and 2°C aligned.

Chart 4.9: Proportion of each CBPS sector with verified science-based targets ^(a)

Footnotes

• Sources: Science Based Targets initiative and Bank calculations.
• (a) The chart shows the proportion of the portfolio with emissions reductions targets that have been calibrated, set and verified by SBTi and to which pathway they are aligned.
• (b) There are no verified SBTi targets within the Energy and Gas sectors as SBTi is currently not accepting targets from any firms involved in the direct extraction and production of fossil fuels while it works on a new target setting methodology.

The proportion of companies whose assets are held in the CBPS that have set a target has increased significantly year on year, from 38% to 59%. Within that, companies are increasingly targeting 1.5°C (Chart 4.9). Of the companies that have set science-based targets, 70% are aligned with a 1.5°C (net zero) pathway, 17% are aligned with ‘well-below 2°C’ and the remaining 14% are aligned with 2°C. There is a notable variation across sectors in the proportion of companies that have set targets. The communications sector has the highest coverage, with over 90% of firms in that sector in our holdings with science-based targets, all of which are 1.5°C aligned. The energy and gas sectors have the lowest coverage: while many of these have publicly stated targets, these are not verified by SBTi. In March 2022 SBTi updated its guidance for the oil and gas sector, and now no longer accepts commitments or targets from any firms involved in the direct extraction and production of fossil fuels. It is working on a new methodology for such companies to set science-based targets that ensure decarbonisation is achieved at the pace and scale required.^{footnote [37]}

While these results signify an improvement in the ambitions of companies’ decarbonisation efforts, companies will have to transform their activities significantly to meet these goals.

Transition risk

According to MSCI’s Low Carbon Transition Management methodology, the overall proportion of firms in the Bank’s CBPS holdings with transition risk exposure, defined as requiring either ‘operational transition’ or ‘product transition’ – ie companies requiring actions to adjust their operational processes or to transition their primary products – reduced slightly from 35% to 33% in 2022. Despite this overall decline, a slightly higher proportion of CBPS companies are now classified as falling within the higher risk product transition category (up from 16% to 20% year on year), reflecting revised assessments by one of the data providers used by the Bank given updated firm-level data and refinements to their methodology (Chart 4.10). Similar to last year, the CBPS has no exposure to the highest transition risk category of ‘asset stranding’.

Chart 4.10: Relative exposures to climate transition risk in the CBPS portfolio ^(a)

Footnotes

• Sources: Certain information ©2022 MSCI ESG Research LLC, reproduced by permission, and Bank calculations.
• (a) This analysis is based on portfolio coverage of 94%.

In addition, a higher proportion of companies fall into MSCI’s ‘solutions’ category, from 4% to 7% year on year. That refers to the greater proportion of the portfolio actively providing climate solutions and is mostly a result of operational improvements at some electricity and transport companies eg to shift to cleaner electricity usage.

To align with the latest TCFD guidance (as described in Box D), the Bank now also calculates the proportion of the CBPS portfolio exposed to ‘carbon-related assets’ as an indicator of exposure to transition risk, using UNEP FI’s Net-Zero Asset Owner Alliance Target Setting Protocol (Chart 4.11). This metric provides a useful baseline assessment of transition risk for the Bank’s corporate holdings. On this basis, the proportion of the portfolio exposed to transition risk is 35%, which is unchanged year on year. The sectors where the Bank has highest transition risk exposure are the energy and utilities sectors (particularly electricity and gas) and there is smaller exposure to manufacturing and transport.

Chart 4.11: Proportion of CBPS companies in high-carbon industries

Footnotes

• Sources: NZAOA Target Setting Protocol 2.0, Refinitiv Eikon and Bank of England calculations.

Box G: Scenario analysis – modelling the financial impacts of transition risk

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 if governments decide to drive transition more actively, for example through the adoption of more stringent ‘carbon taxes’ on emissions.

The time horizons for such risks are much longer than those considered by most traditional portfolio planning models. The approach described below, developed by MSCI, considers what could happen to the valuations of CBPS companies if potential future policy costs out to 2100 (notably carbon prices) were fully priced in by investors today. Unlike the ITR metric, this model does not assume any offsetting actions, such as companies achieving their emission reduction targets. This is an extreme assumption; in reality, the asset values of at least some companies will not fall as far as suggested by this approach, since the firms will adapt their business models further as policy pathways become clearer. Transition will also bring 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 analysis uses a subset of the updated scenarios published by the NGFS in June 2021 (as discussed in Box D). These scenarios are described in Table 4.C ^{footnote [38]}

Table 4.C: A description of the NGFS scenarios used in this scenario analysis

Scenario	Description
Orderly 1.5°C (Net Zero 2050)	Global warming is limited to 1.5°C through stringent climate policies and innovation. Climate policies are introduced immediately.
Disorderly 1.5°C (Divergent Net Zero)	Global warming is limited to 1.5°C but with higher costs due to divergent policies introduced across sectors and a quicker, later, phase out of fossil fuels. The failure to co-ordinate policy results in high burden on consumers.
Disorderly 2°C (Delayed transition)	Global annual emissions do not decrease until 2030. New, stronger, policies are then needed to limit warming to 2°C, and the level of action differs across countries and regions.

Footnotes

• Source: Bank of England.

Estimates of the financial implications of transition risk are calculated by looking at the aggregate costs and benefits each corporate may face under each of these scenarios and discounting them to present value. These are then compared with each firm’s current valuation as measured by their enterprise value (current market value of debt and equity combined). Chart 4.12 presents the results: the horizontal line shows the range of impacts on CBPS company values, the box shows the interquartile range and the vertical line shows the median company impact.

As expected, costs increase, and hence most company valuations fall, most notably in the two disorderly transition pathways relative to the orderly 1.5°C scenario (Chart 4.12).

Chart 4.12: Scenario analysis impact on corporate valuations ^{(a) (b) (c) (d) (e)}

Footnotes

• Sources: Certain information ©2022 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 the potential impacts of physical risk on company values.
• (c) These boxplot charts show the minimum and maximum valuation impacts on portfolio companies (horizontal line), the interquartile range (box) and the median impacts (centre orange line).
• (d) Outliers beyond 1.5 times the interquartile range are excluded.
• (e) This analysis is undertaken for 84% of the portfolio.

The scenarios used for the analysis this year are more severe than in the previous scientific model used by the data provider – in particular, because of higher forward-looking carbon price assumptions across each scenario, reflecting the latest climate science projections. That means estimated downside risks to valuations are higher here than in last year’s climate disclosure. For example, the bottom of the interquartile range in the ‘late policy action’ scenario in last year’s climate disclosure was a 20% fall in company value, compared to around a 50% fall here. Direct comparisons like this are particularly challenging and not meaningful in detail, given the changes in methodology. But at a headline level, given that the more recent scenarios reflect a better understanding of climate impacts, this analysis does suggest greater impacts on financial valuations than estimated previously.

This type of modelling can also help to identify differences in relative exposure to transition risk across sectors. Chart 4.13 presents the potential impacts on company values by sector of the disorderly 2°C scenario. The use of NGFS scenarios has created some differences in effects across sectors versus the estimates the Bank published last year. However, similar to last year, the energy sector is the sector most exposed on average, followed by other high-carbon emitting sectors such as electricity and transport.

These charts also identify some companies who are well placed to take advantage of the opportunities transition provides. As shown by the horizontal lines (representing the range of company results) reaching positive values in the chart, some companies in the electricity and industrial and transport sectors could benefit considerably from embracing the commercial opportunities associated with the transition, based on their current and potential future green activities.

The results in this section should be considered as mainly illustrative of potential impacts on companies valuations, given the number of strong assumptions required in this type of forward-looking scenario model. In addition, to assess the impact on the value of the Bank’s bond holdings would mean, translating the impact of changes in company valuations into estimates of the PD, among other things.

Chart 4.13: Scenario analysis impact of disorderly 2°C degree scenario on corporate valuations by sector ^{(a) (b) (c) (d) (e)}

Footnotes

• Sources: Certain information ©2022 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 the potential impacts of physical risk on company values.
• (c) These boxplot charts show the minimum and maximum valuation impacts on portfolio companies (horizontal line), the interquartile range (box) and the median impacts (centre orange line).
• (d) Outliers beyond 1.5 times the interquartile range are excluded.
• (e) This analysis is undertaken for 84% of the portfolio.

Physical risk

A similar method to the one used for the sovereign holdings can be used for assessing physical risks in the CBPS holdings. The corporate physical risk scores used here 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 to the country as a whole. As for sovereigns, scores estimate potential future physical risks between 2030 and 2040, based on the assumption that the world remains on its current trajectory.

While the methodology is consistent with that used last year, the universe of companies assessed by the external data provider has doubled in size. This increases coverage of the Bank’s corporate holdings from 72% to 87%. Given this, the figures from last year’s disclosure have been restated in Chart 4.14.

Chart 4.14: Physical risk scores for the CBPS holdings ^{(a) (b) (c)}

Footnotes

• Sources: Moody’s Analytics 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 87%. Unlisted corporates are not covered by this assessment.
• (c) The ‘Eligible universe’ reference portfolio represents eligible assets as at the respective portfolio dates, weighted by nominal debt outstanding.

The physical risks to CBPS holdings are deemed moderate and broadly in line with those reported last year when controlling for the increase in data coverage. The physical risks also remain in line with those relating to the wider sterling investment grade corporate bond market (as represented by the purple dots in the chart). Portfolio-level risks remain largely concentrated in the bottom half (ie lower risk) of those companies assessed worldwide by the data provider, indicated by scores less than 50. The exception to this is ‘flooding’ (53rd percentile), reflecting that the portfolio predominantly comprises UK companies and the UK is exposed to elevated flooding risk.

The overall physical risk scores are somewhat higher than their sovereign equivalents shown earlier (Chart 4.4). Differences in scores stem in part from the more granular geographic mapping of companies’ assets to specific regions of the UK. A specific region may be more susceptible to physical risks such as flooding or sea level rise than the country as a whole.

Beneath this portfolio level assessment, the proportion of individual companies that are assessed as having a high physical risk exposure remains low: companies with an overall risk score of 75 or above (indicating that their physical risk exposure is in the top 25% of companies assessed by the data provider) is just above 4% of holdings by value. Two-thirds of these companies operate in in the consumer, non-cyclical sectors (eg pharmaceuticals, food and beverage companies). This is predominantly driven by their elevated exposure to heat stress, reflecting the location of some of their operations.

While these scores give an indication of the potential future physical risks facing corporates, the severity of these risks depends on the actions they and governments take in the future. The potential financial risks associated with different future physical risk pathways are considered in Box H. This analysis suggests that risks facing corporates are highest in a scenario where no further action is taken to mitigate climate change, and could be greatest for the gas, consumer non-cyclical and consumer cyclical sectors.

Box H: Scenario analysis – Modelling the financial impacts of physical risk

The methodology used here assesses the potential impact of physical risks on companies’ future PD. This analysis aims to capture physical risks that occur over longer time horizons than are typically considered in most traditional financial models, and is consistent with that used in last year’s climate disclosure.

There are three alternative scenarios used, also consistent with those used in last year’s climate disclosure – early global policy action, late action and no additional policy action. There are some differences between the scenarios presented here and those in Box G. While both are based on the NGFS scenarios, those in Box G use the latest set of NGFS scenarios published in June 2021. Those presented here use Moody’s Analytics methodology, which draw on the earlier version.

In addition, the time horizons used also differ. The scenarios in Box G consider costs that might occur between now and 2100, whereas the first two scenarios presented here – early global policy action and late action – consider physical risks out to 2050. The final scenario – no additional policy action – assumes governments do not introduce policies to address climate change beyond those already announced. In that case, the physical risk variables are extended further out (by an additional 30 years to 2080) in order to capture the more severe physical risks anticipated to occur in the second half of the century. This approach is in line with that taken for the Bank’s CBES.

The world experiences different levels of emissions, temperature increases and different levels of ‘economic damages’ under each of these scenarios. Estimates of economic damages are taken from an industry standard climate model,^{footnote [39]} which has been extended by Moody’s Analytics to produce estimates of future economic damages from extreme weather events in specific locations.

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 [40]} Chart 4.15 shows the average estimated increase in PD for CBPS-held companies at 10, 20 and 30-year intervals, split by scenario and weighted by 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 over the longest time horizon. The gas and consumer, cyclical and non-cyclical sectors experience the largest increase in PDs under this scenario. These results are broadly consistent with those published last year. These impacts worsen at longer time horizons as the physical impacts of climate change are expected to intensify if no further policy action is taken.

In contrast, physical risks in the early and late policy scenarios are more muted and broadly similar in magnitude across different time horizons. This is because these scenarios assume that sufficient policy action will be taken to mitigate the extreme physical impacts of climate change by 2050.

Chart 4.15: Basis point increase in PD by sector due to physical risk under three alternative policy scenarios ^{(a) (b) (c)}

Footnotes

• Sources: Moody’s Analytics and Bank calculations.
• (a) The PD estimates only estimate 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, 30 year time horizons. The forward PD measures the expected PD of the company, assuming it survives to that year.
• (c) This analysis covers 63% of the portfolio.

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

The Bank’s physical operations are those related to the management and operation of the Bank’s property, plant and equipment, along with non-financial activities undertaken by the Bank’s staff. The Bank’s physical operations are exposed to risks from both the physical effects of climate change and the transition to a net-zero economy.

• Physical risks could affect the maintenance of the Bank’s buildings and property. For example, this could arise through an increase in severe weather events resulting in flood or other weather damage. Physical risks could also have an impact on the Bank’s staff, for example by disrupting travel.
• Transition risks affect energy usage and air travel through fluctuations in energy prices or legislative requirements to decarbonise heating systems.
• Both physical and transition risks can also impact the Bank’s supply chain – such as the companies that supply the Bank with data storage services or raw materials used to produce banknotes.

The Bank’s carbon footprint for physical operations

One way in which the Bank monitors its exposure to transition risks is by tracking its carbon footprint from physical operations.^{footnote [41]}

This year the Bank’s carbon footprint is the lowest since our target was set in 2015/16, having fallen by 9% (1,027 tCO₂e) compared to 2020/21, and by 51% (10,311 tCO₂e) compared to the baseline year of 2015/16,^{footnote [42]} against which the Bank measures progress (Chart 4.16).

The reduction in emissions since last year is mostly attributable to changes in banknote production (801 tCO₂e). This is mainly due to a decrease in the number of banknotes printed but is enhanced by a fall in their carbon intensity resulting from carbon reduction initiatives. Although the decrease in carbon intensity is expected to be a permanent change, the number of banknotes printed is driven by demand and is therefore temporary.

The Bank continues to see the effects of Covid in the carbon footprint, with the overall reduction since the baseline year driven mainly by the low levels of air travel (4,197 tCO₂e ) and the Bank’s permanent move to renewable electricity (5,563 tCO₂e). While the reduction due to decreased air travel is expected to unwind as the impact of Covid diminishes, the Bank anticipates that it is unlikely to revert to 2019/20 levels due to new ways of working. Table 4.D sets out the Bank’s full carbon footprint for the current year, the previous year and the baseline year, against which the Bank measures progress. Annexes 3, 4 and 5 provide further detail on the ways in which the Bank calculates and tracks its carbon footprint.

The temporary nature of some of the factors driving emissions reductions underlines the importance of the work the Bank has done to develop a robust, granular understanding of the its carbon footprint, which allows the Bank to adjust for short-term volatility when setting strategy and planning for transition to net zero.

Chart 4.16: The Bank’s carbon footprint from physical operations since 2015/16 ^{(a) (b) (c)}

Footnotes

• Source: Bank of England.
• (a) The reduced emissions associated with the Bank’s electricity consumption are due to its shift to an electricity supply contract matched by Renewable Energy Guarantee of Origin (REGOs). This means that although the actual electricity supplied to the Bank will come from the National Grid (which draws electricity from a range of sources, both renewable and non-renewable), the Bank’s electricity supplier will be obliged to purchase the same amount of renewable electricity.
• (b) In accordance with the GHG Protocol, the Bank’s emissions associated with the polymer substrate used in banknote production do not include the impact of carbon offsets because these have been purchased by the Bank’s suppliers rather than by the Bank.
• (c) Under the GHG Protocol, Scope 1 emissions are direct emissions (eg from running boilers), Scope 2 emissions are indirect emissions from electricity use (eg from powering its office buildings), and Scope 3 emissions are upstream and downstream value chain emissions (eg emissions from buying products from suppliers and emissions from products when customers use them).

Beyond the impacts of Covid, the Bank has been taking steps to reduce its carbon footprint, which can be seen in this year’s emissions numbers.

The Bank’s move to a contract for the supply of renewable electricity is one of the main factors driving reductions in the Bank’s carbon footprint. Although total electricity consumption remained in line with prior trends, emissions associated with electricity consumption were eliminated in 2021/22 due to the Bank’s purchase of renewable electricity matched by REGOs. This means that although the actual electricity supplied to the Bank will come from the National Grid, which draws electricity from a range of sources, both renewable and non-renewable, the Bank’s electricity supplier will be obliged to purchase the same amount of renewable electricity. This factor also contributed to the fall in emissions this year, relative to 2020/21, as the switch to renewable electricity was made in April 2020 so this is the first full year in which the Bank’s electricity consumption was renewable.

The Bank continues to monitor developments in the field of renewable energy and is committed to ensuring that it continues to consider the greenest options available in the market each time the electricity supply contract is put up for tender.

The Bank’s emissions from air travel remained at historic lows in 2021/22 due to behaviours associated with Covid restrictions and the implementation of hybrid working. The Bank has taken steps to raise internal awareness of the emissions implications of travel choices and Bank colleagues are increasingly choosing to join overseas events virtually where this can still meet business needs. The Bank expects levels of air travel to increase in future; this year the Bank has already begun to see a small increase in emissions from air travel relative to 2020/21 (119 tCO₂e). However, the Bank does not expect the increase in air travel emissions to return to pre-Covid levels, due to anticipated changes in working practices. In the longer-term the Bank expects to see a pragmatic approach emerge that balances emissions with the need for travel.

This year the emissions associated with production of the polymer substrate used in banknote production made up 67% of the Bank’s carbon footprint (6,560 tCO₂e). The Bank produces new banknotes in order to meet future public demand, and, as a result, does not control the quantity of banknotes required, which is a key driver of the emissions associated with production of polymer substrate. Within that constraint however, the Bank works proactively with suppliers with the aim of decreasing the carbon intensity of new banknotes over time through carbon reduction initiatives. The effect of this work can be seen in Table 4.E, which shows the carbon emissions from polymer substrate production by denomination per 1,000 finished banknotes since 2017/18, illustrating the fall in carbon intensity for each denomination over time.

The Bank continues to secure carbon neutrality for its contracted supply of polymer substrate for all denominations. This is achieved by the Bank’s suppliers through a combination of carbon reduction initiatives and offsets. As noted in Chart 4.16 and in accordance with GHG reporting regulations, the impact of the carbon offsets purchased by the Bank’s suppliers is not included in the Bank’s carbon footprint.

Natural gas usage remains one of the main contributors to the Bank’s carbon footprint, responsible for 30% of total emissions this year (2,949 tCO₂e). Gas consumption rose slightly compared to the previous year (by 314 tCO₂e), due to an overall colder year, and as operational hours increased at one of the Bank’s sites. Although gas use will remain a key emission in the medium-term, the Bank is actively working to minimise emissions. This includes work to optimise building management systems to reduce consumption, and measures to ensure refurbishment projects take climate considerations into account to reduce environmental impact. The Bank is also exploring options for decarbonising the Bank’s heating systems in the longer term.

The Bank continues to take steps to reduce the carbon emissions associated with its supply chain. Sustainability and carbon reporting are key parts of the Bank’s major tenders, demonstrating to its suppliers the value the Bank places on environmental credentials. The Bank is also part-way through a multi-year project with an external provider to rate the Bank’s key suppliers on their sustainability and carbon emissions. This will be a key input into the Bank’s net-zero transition planning.

Box I: The impact of changing ways of working

In common with many organisations, the Bank’s working practices have changed due to the pandemic. As a result of this, in recent years the Bank’s carbon footprint^{footnote [43]} has been temporarily reduced. In future years the Bank expects this element of the recent decrease in emissions to partially unwind, even as further efforts are made to achieve emissions reductions. However, the Bank does not expect its future emissions to have the same profile as before the pandemic. Working through Covid restrictions has shown that the Bank can deliver its mandate through alternative working arrangements. The Bank expects to evolve new working patters, which will reduce emissions, and is also looking at the UK footprint of its operations.

Estimating the carbon emissions associated with working from home

An area of focus for the Bank is the impact of its evolving working practices, in particular working from home patterns, on the Bank’s carbon emissions. There is no standard methodology for calculating emissions associated with working from home, so the Bank does not include it in its carbon footprint. However, last year the Bank did undertake and report on preliminary work to better understand how working from home may potentially impact emissions. This year the Bank has refined the analysis in anticipation of new ways of working, which will mean that emissions from home working become part of normal behaviours.

The accuracy of the analysis has been improved by refining key assumptions through the use of survey data, which was gathered from Bank colleagues. The survey asked Bank staff questions on: how frequently they work from home; how many other occupants are in the home at the same time; how the home is heated; and whether renewable electricity is purchased. The other material change in this year’s analysis is that the scope was broadened to include estimated emissions for staff at all Bank sites, rather than just at Threadneedle Street. This was done by extrapolating the survey data.^{footnote [44]}

The Bank has estimated the emissions associated with commuting, office heating and home heating for the past three years in two scenarios. The first scenario considers what the emissions profile would be under the assumption that electricity emissions are in line with the national average^{footnote [45]} (Chart 4.17). The second scenario considers what emissions look like using the Bank’s actual energy supply (gas and renewable electricity) across its sites, and actual consumption of both gas and electricity by staff in their homes as indicated in survey responses.^{footnote [46]} (Chart 4.18).

Chart 4.17: Carbon emissions for all Bank staff using a carbon grid average electricity carbon factor ^{(a) (b) (c)}

Footnotes

• Source: Bank of England.
• (a) Bank site electricity and Bank site gas represent emissions due to consumption of electricity and gas at Bank sites. Electricity emissions are calculated using the national average carbon factor for electricity.
• (b) Commuting emissions are estimated based on staff commuting survey data.
• (c) Home emissions are estimated based on data obtained during a staff survey, including size of home, how frequently they work from home; how many other occupants are in the home at the same time and how the home is heated. Using this and national average energy consumption data for properties of each size, electricity and gas consumption for home use is estimated. Emissions associated with home electricity consumption are calculated using the national average carbon factor for electricity. Survey responses represent 13% of Bank staff and this is extrapolated to the rest of the Bank.

Consistent with last year, the Bank found that the energy consumption and gas usage associated with the Bank’s buildings remain relatively constant independent of the number of staff working in the building (Chart 4.17). The slight increase in gas use relative to the 2020/21 was driven by colder temperatures and an increase in operational hours at one of the Bank’s sites. In the Bank’s case, the impact on emissions of home working can therefore broadly be reduced to the combined impact of the changes in commuting and home heating. While the reduction in commuting is estimated to have reduced emissions to some extent, this is more than offset by increased emissions from home heating (Chart 4.17). However, when the use of renewable electricity is taken into account (both in Bank premises and in staff homes), there is a clear reduction in emissions (Chart 4.18).

Chart 4.18: Carbon emissions for all Bank staff using actual electricity purchased by the Bank and in staff homes ^{(a) (b)}

Footnotes

• Source: Bank of England.
• (a) Bank site electricity emissions are calculated using a market based emissions factor, reflecting the emissions associated with the actual electricity purchased by the Bank (ie renewable electricity from April 2020 onwards).
• (b) Home electricity emissions are estimated based on the percentage of staff purchasing renewable electricity (based on survey responses), with the remainder calculated using the national average carbon factor.

Although the analysis remains necessarily high level, it continues to highlight the potential for home working to result in a significant increase in emissions, underlining the importance of considering more sustainable energy options. Chart 4.18 illustrates that, in the Bank’s case, the lower emissions achieved by switching to renewable electricity more than offset the increased emissions associated with home working. In addition to efforts the Bank is making to reduce its own emissions, the Bank will seek to provide staff with a range of information about how to improve the energy efficiency of their homes should they wish to. This will include information about how to improve their insulation, the role of green tariffs to reduce carbon footprints, how to utilise emerging domestic technologies etc.

The Bank will carefully consider the impact of home working when developing its net-zero strategy, and continues to explore ways in which it could incorporate home working emissions into its carbon footprint, dependent on the progress made in the development of a standard methodology.

The Bank’s geographical footprint

One area of focus for the Bank in refreshing its working practices is the evolution of its geographical footprint. The Bank’s physical presence in locations across the country is a critical component of the Bank’s mission, specifically its ability to serve and represent all the people in the United Kingdom. To better achieve these aims the Bank plans to create a new Northern Hub and expand its existing presence in the regions and nations of the UK.

The project provides an opportunity for the Bank to build its capability and demonstrate leadership by including environmental outcomes as an explicit priority on strategic projects. The project governance procedures will incorporate a review of climate risks and carbon impact to ensure climate change considerations are factored into decision making. This will include an assessment of the impact of increased travel by Bank colleagues between offices, detailed analysis of the impact of the new premises on emissions, and assessments for senior leadership of the extent to which potential options can accelerate delivery of the Bank’s objectives to limit its environmental impact. The Northern Hub’s final design will aim to balance the demands of the organisation while seeking to support the Bank’s reduction of its overall carbon and environmental footprints.

The Bank’s carbon targets for physical operations

The Bank has two main carbon targets: a near-term target to be reached by 2030 and a longer-term target to reduce emissions from the Bank’s physical operations to net zero.

2030 target

The Bank remains on track to meet its 2030 target^{footnote [47]} to reduce its absolute GHG emissions by 63% from 2016 to 2030, covering the Bank’s 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, mainly for the reason that banknote production needs to respond to the demand for cash from businesses and households, and as such the volume of notes produced is outside the Bank’s control. ^{footnote [48]} The target is informed by the Science-Based Target (SBT) methodology and has been verified by the Carbon Trust as consistent with aligning emissions from the Bank’s physical operations to the goals of the Paris Agreement.

Last year the Bank achieved a 74% (9,629 tCO₂e) reduction in the target emissions relative to baseline; a reduction in emissions beyond that required to meet the Bank’s target. This reduction was due to the combination of the Covid impact on air travel and the movement to renewable sources of electricity. This year the reduction in the target emissions relative to baseline remained broadly in line with the previous year at 75% (9,755 tCO₂e). This was again due to the Bank’s move to renewable electricity, balanced by small increases in gas consumption and air travel. It is likely that some of the reduction observed over the last two years will unwind as air travel continues to increase post Covid. However, we expect the Bank will remain on track to meet its 2030 target. The movements in emissions relative to the baseline year are shown in Chart 4.19 and further detail of the Bank’s physical operations emissions relevant to its 2030 target are set out in Annex 6.

Chart 4.19: The Bank’s 2030 target since 2015/16

Footnotes

• Source: Bank of England.

Net-zero target

The UK Government has legislated for net zero by 2050^{footnote [49]} and is currently exploring how that can be achieved. In last year’s climate disclosure, the Bank committed to reduce emissions from its physical operations to net zero by 2050 at the latest. This net-zero target will cover the full scope of the Bank’s physical operations and is consistent with the target in the Climate Change Act 2008.

The Bank’s strategy to achieve its net-zero target is currently being explored in the context of the ongoing development of global norms in climate transition planning, and the Bank aims to publish its net-zero transition plan for its physical operations as part of next year’s climate disclosure. In doing so it aims to contribute to the development of net-zero transition planning within the context of central banking.

Figure 4.5: Milestones on the Bank’s pathway to net zero.

Footnotes

• Source: Bank of England.

Annexes

• Annex 1: TCFD recommendations index

  Table A1.1 indicates where in this climate disclosure each of the 11 TCFD recommendations is covered. Reflecting the fact that the TCFD recommendations aren’t tailored to central banks, the Bank exercises discretion in the way in which it interprets the recommendations in the context of its own climate disclosure.

  Table A1.1: A summary of where each TCFD recommendation is covered within this climate disclosure

  TCFD Pillars	TCFD recommended climate disclosure	Climate disclosure references
  Governance Disclose the organisation’s governance around climate-related issues and opportunities	a. Describe the board’s oversight of climate-related risks and opportunities.	Court of Directors’ oversight of the Bank’s management of climate-related risk (Section 2).
  	b. Describe management’s role in assessing and managing climate-related risks and opportunities	Management’s role in assessing and managing climate-related risks (Section 2).
  Strategy Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s business, strategy and financial planning where such information is material.	a. Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long-term.	Key climate-related risks to the Bank’s financial operations (Section 4). Key climate-related risks to the Bank’s physical operations (Section 4).
  	b. Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning.	Strategy (Section 3).
  	c. Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2 degree or lower scenario.	Key climate-related risks to the Bank’s financial operations (Section 4).
  Risk Management Disclose how the organisation identifies, assesses and manages climate-related risks	a. Describe the organisation’s processes for identifying and assessing climate-related risks.	Risk management (Section 4).
  	b. Describe the organisation’s processes for managing climate-related risks.	Governance (Section 2). Risk management (Section 4).
  	c. Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.	Risk management (Section 4).
  Metrics and Targets Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material	a. Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.	Key climate-related risks to the Bank’s financial operations (Section 4). Key climate-related risks to the Bank’s physical operations (Section 4).
  	b. Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG emissions, and the related risks.	Key climate-related risks to the Bank’s financial operations (Section 4). Key climate-related risks to the Bank’s physical operations (Section 4).
  	c. Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.	Key climate-related risks to the Bank’s financial operations (Section 4). Key climate-related risks to the Bank’s physical operations (Section 4).

  Footnotes

  • Source: Bank of England.

• Annex 2: Climate-related issues reflected in the Bank’s Remit Letters

  Table A2.1 below is a summary of how the Bank’s Remit Letters have reflected climate change risk, environmental risk, net-zero strategy and energy security strategy. The Bank and the PRA may also be required to take into account other considerations that are not identified in this table, for example under legislation. Table A2.1 should therefore not be read as a comprehensive set of all climate- and environment-related considerations applicable to the Bank and PRA.

  Table A2.1: A summary of how the Bank’s Remit Letters have reflected climate change risk, environmental risk, net-zero strategy and energy security strategy ^{(a) (b) (c) (d) (e) (f) (g)}

  	Monetary Policy Committee	Financial Policy Committee	Prudential Regulation Committee
  Addressing the risks from climate change		“[…] the Committee should continue to act with a view to building the resilience of the UK financial system to the risks from climate change and support the government’s ambition of a greener industry, using innovation and finance to protect our environment and tackle climate change”. “[…] the Committee should continue to regard risks from climate change as relevant to its primary objective.”
  Addressing the risks from environmental / biodiversity change		“In addition [to climate-related risks], the Committee should consider the potential relevance of other environmental risks to its primary objective”.
  Supporting the UK Government's net-zero strategy	“I am today updating the MPC’s remit to reflect the government’s economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy”.	“The Committee should act with a view to supporting the government’s overall strategy for financial services, where doing so does not conflict with the achievement of the Committee’s primary objective – covering, in particular: […] Environmental sustainability and climate change. The government aims to align private sector financial flows with environmentally sustainable and resilient growth, and to strengthen the competitiveness of the UK financial sector by ensuring it can capture the opportunities arising from the greening of finance and to help foster the transition to net zero […]”	“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”.
  Supporting the UK Government's energy security strategy		“Where practical and relevant, the Committee should have regard to the government’s energy security strategy and the important role that the financial system will play in supporting the UK’s energy security - including through investment in transitional hydrocarbons like gas - as part of the UK’s pathway to net zero”.	“Where practical and relevant, the PRC should have regard to the government’s energy security strategy and the important role that the financial system will play in supporting the UK’s energy security - including through investment in transitional hydrocarbons like gas - as part of the UK’s pathway to net zero”.

  Footnotes

  • Source: Bank of England.
  • (a) See pages 16 and 17 of the 2022 Annual Report for further details on the role of the Monetary Policy Committee (MPC) and its membership.
  • (b) See pages 18 and 19 of the 2022 Annual Report for further details on the role of the Financial Policy Committee (FPC) and its membership.
  • (c) See pages 20 and 21 of the 2022 Annual Report for further details on the role of the Prudential Regulation Committee (PRC) and its membership.
  • (d) Further detail on the way in which climate change risk is reflected in the Bank’s remit and recommendation letters can be found on pages 2 and 6 of the Remit and Recommendations for the FPC letter dated 3 March 2021.
  • (e) Further detail on the way in which environmental risk is reflected in the Bank’s remit and recommendation letters can be found on page 6 of the Remit and Recommendations for the FPC letter dated 3 March 2021.
  • (f) Further detail on the way in which the UK Government’s net-zero strategy is reflected in the Bank’s remit and recommendation letters can be found on page 1 of the Remit For The MPC letter dated 3 March 2021, page 4 and pages 7-8 of the Remit and Recommendations for the FPC letter dated 3 March 2021 and page 6 of the Recommendations for the PRC letter dated 23 March 2021.
  • (g) Further detail on the way in which the UK Government’s energy security strategy is reflected in the Bank’s remit and recommendation letters can be found on pages 1 and 2 of the Recommendations for the FPC letter dated 7 April 2022 and pages 1 and 2 of the Recommendations for the PRC letter dated 7 April 2022.

  Background information on the Bank’s policy committees and remit setting process

  The responsibility of the MPC is to formulate monetary policy in relation to which its statutory objectives are to maintain price stability; and, subject to that, to support UK Government’s economic policies, including its objectives for growth and employment. The role of the FPC is to contribute to the Bank’s mission to achieve financial stability primarily by identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system; and, subject to that, supporting the UK Government’s economic policies, including its objectives for growth and employment. The FPC also regularly reviews the Bank’s Financial Stability Strategy. Finally, the PRC is the body within the Bank responsible for exercising the Bank’s functions as the Prudential Regulation Authority (PRA) as set out in the Bank of England Act 1998 (the Act) and the Financial Services and Markets Act 2000 (FSMA).^{footnote [50]}

  The Act requires that the Chancellor specifies price stability and the UK Government's economic policy at least once in every period of 12 months. There is a similar requirement for HM Treasury to specify the UK Government’s economic policy and make recommendations to the FPC on its objectives at least once in each calendar year. The Act also requires HM Treasury, at least once in each Parliament, to make recommendations to the PRC about aspects of the economic policy of the UK Government to which the PRC should have regard when considering how to advance the objectives of the PRA and when considering the application of the regulatory principles set out in the Financial Services and Markets Act 2000.

• Annex 3: 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 the Bank’s carbon footprint by 63% from 2016 to 2030. This target covers the Bank’s 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 target’. In 2021 the Bank committed to reaching net-zero emissions across its physical operations, known as the Bank’s ‘net-zero target’.

  The Bank will report on its carbon footprint and progress towards its 2030 target each year in this climate disclosure. The Bank aims to publish the strategy to meet its net-zero target in its next climate disclosure (2022/23), and progress towards that target will be reported in this climate disclosure in each subsequent year. This annex provides further information on the Bank’s carbon footprint and its 2030 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 target focuses only on those emissions the Bank can influence most effectively by changing its behaviour, for instance by reducing travel. Table A3.1 sets out the emissions included in the Bank’s 2021/22 carbon footprint and 2030 carbon target.

  Table A3.1: Emissions included in the Bank’s carbon footprint and 2030 target

  Types of emissions	Activity	Included in carbon footprint	Included in 2030 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 are therefore not included in the Bank’s calculations.

  Baseline

  Both the Bank’s 2030 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 A3.2 below.

  Table A3.2: Total emissions for the baseline year for the Bank’s 2030 target and 2021/22 carbon footprint ^{(a) (b) (c)}

  Types of emissions	Activity	Carbon footprint 2015/16 baseline year (tCO2e)	2030 target 2015/16 baseline year (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)	1,271	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	20,127

  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 target

  To set its 2030 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 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.

• Annex 4: The Bank’s carbon footprint in historic reporting format

  Starting from last year (2020/21) the Bank made three changes to the way it reports its carbon footprint and 2030 target to better reflect its operations. 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, as banknote production will represent an increasing proportion of the Bank’s carbon footprint as other sources of emissions are reduced.

  This re-baselining process was first reported in the Bank’s climate disclosure for 2020/21, which provides further detail on the changes.

  To facilitate comparison with previous reporting, the Bank’s 2021/22 carbon footprint is set out below 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 A4.1 below reflects reduced emissions due to the increased proportion of renewable electricity in the National Grid and reduced levels of air travel due to Covid restrictions.

  Table A4.1: The Bank’s carbon footprint for 2021/22 in historic reporting format

  Types of emissions	Activity	2021/22 (tCO2e)	Per cent of total (%)	Per cent change from baseline (%)
  Direct (Scope 1)	Natural gas	3,306	30
  	Oil – generators	2	0
  	Vehicles fleet	55	0
  	Refrigerants	97	1
  	Subtotal	3,460	-	101
  Direct (Scope 2)	Electricity	6,853	61
  	Subtotal	6,853	-	-58
  Indirect (Scope 3)	Electricity (transmission and distribution)	606	5
  	Air travel	139	1
  	Rail travel	5	0
  	Water	28	0
  	Office paper	1	0
  	Waste	12	0
  	Subtotal	791	-	-87
  	Paper (banknotes)	Not included in scope in historic format.
  	Polymer (banknotes)
  	Subtotal
  Total gross emissions (tCO2e)		11,104		-56

  Footnotes

  • Source: Bank of England.

• Annex 5: 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 climate disclosure. 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 is included in Annex 4 and the Bank’s intensity metrics are included within the main body of this climate disclosure. Table A5.1 and Chart A5.1 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 A5.1: Energy consumption at all Bank sites since 2015/16

  Total energy use (kWh)	2017/18	2018/19	2019/20	2020/21	2021/22
  Electricity	35,815,517	34,431,895	33,510,896	31,816,328	32,273,135
  Gas	17,919,521	16,462,358	15,142,556	16,521,754	18,046,857
  Transport	490,164	401,019	370,373	201,841	202,824
  Total	54,225,202	51,295,272	49,023,825	48,539,922	50,550,704

  Footnotes

  • Source: Bank of England.

  Chart A5.1: Energy consumption at all Bank sites since 2015/16

  

  Footnotes

  • Source: Bank of England.

• Annex 6: The Bank’s carbon target

  Table A6.1 sets out the detail of the Bank’s emissions relevant to its carbon target for 2021/22, the previous year and the baseline year in the current reporting format.

  Table A6.1: The Bank’s 2030 Target ^{(a) (b)}

  Types of emissions	Activity	2021/22 (tCO2e)	2020/21 (tCO2e)	2015/16 baseline year (tCO2e)
  Direct (Scope 1)	Natural gas	2,949	2,635	2,890
  	Oil – generators	2	3	5
  	Vehicles fleet	55	51	97
  	Refrigerants	72	141	53
  	Subtotal	3,078	2,830	3,045
  Direct (Scope 2)	Electricity	0	498	5,563
  	Subtotal	0	498	5,563
  Indirect (Scope 3)	Electricity (transmission and distribution)	NA	NA	NA
  	Air travel	137	18	4,334
  	Rail travel	5	0	33
  	Water	NA	NA	NA
  	Office paper	NA	NA	NA
  	Waste	NA	NA	NA
  	Subtotal	142	18	4,367
  	Paper (banknotes)	NA	NA	NA
  	Polymer (banknotes)	NA	NA	NA
  Total gross emissions (tCO2e)		3,220	3,346	12,975

  Footnotes

  • Source: Bank of England.
  • (a) Emissions associated with the use of refrigerants were not accounted in 2015/16. The figure shown for the baseline year is an estimate based on an average of the following years.
  • (b) The emissions associated with the Bank’s electricity consumption reflect the fact that the Bank purchases renewable electricity backed by REGOs. This means that although the actual electricity supplied to the Bank will come from the National Grid (which draws electricity from a range of sources, both renewable and non-renewable), the Bank’s electricity supplier will be obliged to purchase the same amount of renewable electricity.

• Annex 7: Abbreviations

  Act – The Bank of England Act 1998.

  ARCO – Audit and Risk Committee.

  APF – Asset Purchase Facility.

  Bank – The Bank of England.

  BCBS - Basel Committee on Banking Supervision.

  BEALF – Bank of England Alternative Liquidity Facility.

  CBES – Climate Biennial Exploratory Scenario.

  CBPS – Corporate Bond Purchase Scheme.

  CCFF – Covid Corporate Financing Facility.

  CCFFL – Covid Corporate Financing Facility Limited.

  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 – severe acute respiratory syndrome coronavirus 2.

  CP – commercial paper.

  EDCSG – Executive Directors’ Climate Steering Group.

  EPC – Energy Performance Certificate.

  FCA – Financial Conduct Authority.

  FPC – Financial Policy Committee.

  FSB – Financial Stability Board.

  FSMA – Financial Services and Markets Act 2000.

  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, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union. Spain is also invited as a permanent guest.

  GDP – gross domestic product.

  GHG – greenhouse gas.

  Gilts – sterling sovereign government bonds.

  IAIS – International Association of Insurance Supervisors.

  IFRS – International Financial Reporting Standards.

  IPCC – Intergovernmental Panel on Climate Change.

  ISSB – International Sustainability Standards Board.

  ITR – Implied Temperature Rise.

  MI – Market Intelligence.

  MPC – Monetary Policy Committee.

  NACE – Nomenclature of Economic Activities.

  NDC – Nationally Determined Contributions.

  NGFS – Network for Greening the Financial System.

  PCAF – Partnership for Carbon Accounting Financials.

  PD – Probability of Default.

  PRA – Prudential Regulation Authority.

  PRC – Prudential Regulation Committee.

  REGO – Renewable Energy Guarantee of Origin.

  SBT – Science Based Target.

  SBTi – Science Based Targets Initiative.

  SDR – Sustainability Disclosure Requirements.

  SECR – Streamlined Energy and Carbon Reporting.

  SIF – Sustainable Insurance Forum.

  SMF – Senior Management Function.

  TCFD – Task Force on Climate-related Financial Disclosures.

  TCFR – Task Force on Climate-related Financial Risks.

  TPT – Transition Plan Taskforce.

  UNEP FI - United Nations Environment Programme Finance Initiative.

  UNFCCC – United Nations Framework Convention on Climate Change.

  WACI – Weighted Average Carbon Intensity.