Environmental advocacy groups have spent years pressuring banks and financial institutions to divest from fossil fuels, and that momentum has only intensified since the Covid-19 pandemic accelerated the global push to replace oil, gas, and coal with renewable energy alternatives. The United Kingdom has a legally binding commitment to reach net zero greenhouse gas emissions by 2050 under the Climate Change Act, making central bank alignment with that target a matter of growing relevance.

In June, the Bank of England disclosed—without a formal public announcement—that it will stop accepting bonds tied to coal operations as collateral for key lending arrangements. The prohibition takes effect in October and represents the institution's latest step to discourage the use of thermal coal in electricity generation. Under the updated policy, commercial banks will no longer be permitted to pledge thermal coal–linked bonds as collateral when borrowing from the central bank.

The decision signals that the Bank of England now deems thermal coal–linked bonds too risky for its own balance sheet, as consumers and governments around the world demand a transition away from what is widely described as "the dirtiest fossil fuel." The rapid global shift toward renewable energy could cause certain fossil fuel assets to become what analysts call "stranded assets"—resources that lose economic value well before the end of their expected useful life—increasing their financial risk profile over the coming decades.

In its policy statement, the Bank of England noted that thermal coal companies "can be exposed to potential financial risks connected to the adjustment of the economy towards net zero." The institution also indicated it would apply discounts to the value of bonds in other relevant sectors "to protect the Bank against financial risks."

The Bank of England routinely extends loans to major U.K. banks—including Barclays, Lloyds, NatWest, and HSBC—to facilitate transaction settlement and operational efficiency. To access these loans, commercial banks are required to provide collateral, typically in the form of bonds.

A broad spectrum of financial institutions have already imposed varying restrictions on the thermal coal sector. However, restrictions enacted by a central bank of this stature may prompt commercial banks to reassess their ties to the coal industry. The Bank of England was among the first major central banks to conduct climate stress tests on the financial institutions it supervises, completing its Climate Biennial Exploratory Scenario exercise in 2022, and is a member of the Network for Greening the Financial System, a group of over 100 central banks and supervisors coordinating on climate-related financial risk.

The Bank of England's new policy is more stringent than comparable measures adopted by institutions such as the European Central Bank. Yet the move drew little public attention because the Bank published the updated policy on its website rather than issuing a formal announcement. This restrained approach to climate policy reflects several factors, including mounting pressure from the United States government to abandon renewable energy initiatives in favor of continued fossil fuel development.

Ellie McLaughlin, senior policy and advocacy manager at the campaign group Positive Money, said: "It's a strong signal from a central bank, and to the market as well." McLaughlin added, "The Bank of England has been much less vocal about this and its wider climate work in recent years, for kind of various reasons… It's quite significant, but there are definitely a lot of areas where the Bank could be going further."

Over recent years, the Bank of England has implemented a range of changes to its bond schemes and other financial mechanisms designed to support the global green transition and mitigate risks tied to certain fossil fuels. On its website, the Bank states: "In 2021, we started to adjust the CBPS to support an orderly economy-wide transition to net zero, subject to maintaining its primary monetary policy purpose, protecting public money, and basing any adjustments on robust and proven metrics."

The policy shift arrives less than a year after research found that no major bank had yet committed to halting financing for new oil, gas, and coal projects. A report published in October by the TPI Global Climate Transition Centre at the London School of Economics and Political Science indicated that most banks which had recently updated their climate policies had actually weakened them.

The report, which examined climate policies across 36 of the largest banks by market capitalisation and total assets, concluded that "banks are still at an early stage of their transition with decarbonisation targets that cover a limited set of sectors and business activities."

According to the report, banks have "weakened their disclosures in areas such as net zero commitments, financing conditions for high-emission sectors and fossil fuel policies." Some institutions either fully withdrew or diluted their net zero commitments, replacing concrete terms like "commitment" or "target" with vaguer language such as "ambition" or "aspiration."

While many major banks remain unwilling to pledge an end to financing new fossil fuel projects, a growing number are distancing themselves from coal. According to the Institute for Energy Economics and Financial Analysis, more than 200 globally significant financial institutions—including asset managers, asset owners, international banks, and others—now maintain formal divestment policies that restrict investment in thermal coal mining and/or coal-fired power projects.

An increasing number of banks now view long-term investment in more polluting fossil fuels as financially risky, prompting them to curtail their exposure to the coal sector. This trend may encourage additional financial institutions to adopt similar stances in the years ahead and could channel greater capital toward alternative energy sources such as renewables.

By Felicity Bradstock for Oilprice.com