Bank of England Excludes Thermal Coal Bonds from Collateral Framework

The Bank of England has announced it will no longer accept bonds linked to thermal coal companies as eligible collateral for lending facilities, marking a significant shift in central bank risk management policy. The decision, which takes effect in October, represents an explicit acknowledgement that assets tied to the coal sector pose material financial risks as global energy markets transition away from fossil fuels.

The policy change affects the collateral framework governing loans to commercial banks including Barclays, Lloyds, NatWest and HSBC. These institutions routinely access central bank facilities to manage liquidity and settlement requirements, pledging bonds and other securities as guarantees against borrowing. The exclusion of thermal coal bonds from this framework suggests the Bank has concluded that climate transition risks render such assets unsuitable for its balance sheet.

In its policy statement, the Bank cited exposure to “potential financial risks connected to the adjustment of the economy towards net zero” as justification for the thermal coal exclusion. The institution indicated it would also apply haircuts to bonds in other unspecified sectors to protect against climate-related financial risks, though details of this broader framework remain forthcoming.

Ellie McLaughlin, senior policy and advocacy manager at Positive Money, characterised the move as “a strong signal from a central bank, and to the market as well”. Climate campaigners hope the policy will encourage commercial banks to reconsider their exposure to thermal coal assets more broadly, given the reduced utility of such holdings as collateral.

The Bank’s approach appears more stringent than that of several peer institutions, including the European Central Bank. However, the announcement itself was notably low-key, with the policy quietly published on the Bank’s website in early June without significant promotional activity. This understated approach may reflect the increasingly contentious political environment surrounding climate finance, particularly following a US-led pushback against environmental, social and governance initiatives since the return of Donald Trump to the White House.

Data from Paris-based non-profit Reclaim Finance indicates that approximately 150 of the world’s largest financial institutions had implemented some form of thermal coal restrictions as of September last year. Nevertheless, the effectiveness of the Bank of England’s policy will depend substantially on implementation details, including the methodology for calculating climate risk haircuts and the potential scope for extending exclusions beyond thermal coal to encompass other high-carbon activities such as fossil fuel expansion and deforestation.

Whilst campaigners have welcomed the thermal coal exclusion as a meaningful step, questions remain regarding the comprehensiveness of the Bank’s climate risk framework. The central bank faces ongoing pressure to demonstrate how its collateral policies align with broader financial stability objectives in an economy undergoing energy transition, particularly as commercial banks navigate conflicting pressures from climate-conscious stakeholders and an increasingly polarised political landscape surrounding sustainability mandates.