Environmental groups have campaigned for years to pressure banks and financial institutions into divesting from fossil fuels, with momentum building since the Covid-19 pandemic amid a global push to transition from oil, gas, and coal toward renewable energy sources.

In June, the Bank of England quietly announced on its website that it would no longer accept bonds associated with coal operations as collateral for key lending arrangements. The prohibition takes effect from October. Under the new policy, commercial banks will be barred from using bonds linked to thermal coal as collateral when borrowing from the central bank.

The decision signals that thermal coal–linked bonds are now considered too risky for the Bank's balance sheet, as consumers and governments worldwide demand a shift away from what is widely described as the dirtiest fossil fuel. Thermal coal burned for electricity generation produces more carbon dioxide per unit of energy than any other fossil fuel, making it a primary target of early divestment efforts. The rapid global transition to renewable energy could cause certain fossil fuel assets to depreciate over the coming decades, increasing their financial risk profile.

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

The Bank of England routinely provides loans to major UK banks — including Barclays, Lloyds, NatWest, and HSBC — to help them settle transactions and conduct operations. Commercial banks must provide collateral, typically in the form of bonds, to access these loans.

A wide range of financial institutions have already imposed restrictions on the thermal coal industry. However, restrictions introduced by a central bank of the Bank of England's stature — the central bank of a G7 economy legally committed to reaching net zero emissions by 2050 — may prompt commercial banks to reconsider their ties to the coal sector.

The Bank of England's policy is stricter than that of comparable institutions, such as the European Central Bank. The ECB, which completed a review of its collateral framework in 2022, has applied climate-related adjustments to its corporate bond holdings but has not implemented a blanket prohibition on thermal coal–linked collateral. The Bank of England's move has drawn little public attention, however, because the Bank published the policy on its website rather than issuing a formal announcement. This understated approach to climate action 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."

The Bank of England has implemented a broad range of changes to its bond schemes and other financial mechanisms in recent years, aimed at supporting the global green transition and mitigating 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 CBPS, or Corporate Bond Purchase Scheme, is the Bank's programme for purchasing corporate debt on secondary markets, and the climate adjustments meant bonds from companies with stronger climate performance were favoured over those from high-emission firms.

The policy shift comes less than a year after a study found that no major banks had yet committed to stop funding 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 that had recently updated their climate policies had actually weakened them.

The report, which analysed the climate policies of 36 of the largest banks by market capitalisation and total assets, found 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 banks had either fully withdrawn or weakened their net zero commitments, replacing firm terms such as "commitment" or "target" with more ambiguous language like "ambition" or "aspiration."

While several major banks remain unwilling to commit to ending fossil fuel financing, a growing number are moving away from coal. According to the Institute for Energy Economics and Financial Analysis, over 200 globally significant financial institutions — including asset managers, asset owners, international banks, and other financial entities — now maintain formal divestment policies restricting investment in thermal coal mining and coal-fired power projects.

As more banks increasingly view long-term investment in carbon-intensive fossil fuels as a financial liability, they are limiting their exposure to the coal industry. This trend may encourage additional financial institutions to follow suit and could drive greater capital allocation toward alternative energy sources such as renewables.

By Felicity Bradstock for Oilprice.com.