Bank of England Bans Coal Bonds from Collateral

The Bank of England has announced that it will no longer accept bonds linked to thermal coal operations as collateral for loans provided to commercial banks. This new restriction is set to come into force in October and marks a significant shift away from financing the fossil fuel sector within the United Kingdom’s financial system.

Under the updated policy, any debt instruments associated with coal production are now deemed too risky to appear on the central bank’s balance sheet. The decision aligns with growing global pressure to transition away from what is often described as the dirtiest fossil fuel in favour of renewable alternatives. Officials at the Bank stated that thermal coal companies face potential financial risks connected to the broader economic adjustment towards net zero targets.

To protect itself against these emerging threats, the institution will also discount the value of bonds held by other relevant sectors. This measure ensures that commercial banks borrowing from the central bank must provide guarantees in forms not linked to high-emission industries. The Bank provides essential liquidity loans to major UK lenders including Barclays, Lloyds, NatWest and HSBC to help them settle transactions efficiently.

While a wide range of financial institutions have previously introduced restrictions on thermal coal investments, this move by the central bank carries particular weight due to its status as a lender of last resort. The policy is stricter than that of similar bodies such as the European Central Bank. However, the announcement was released quietly via the website rather than through a formal public press conference.

Ellie McLaughlin, a senior policy and advocacy manager at Positive Money, described the development as a strong signal to both the central bank and wider markets. She noted that while the institution has been less vocal about its climate work in recent years due to various reasons, this action is quite significant. Nevertheless, she suggested there remain areas where further progress could be made.

The Bank explained on its website that adjustments began in 2021 to support an orderly economy-wide transition to net zero while maintaining primary monetary policy purposes and protecting public money. These changes are based on robust metrics designed to reduce risk associated with certain types of fossil fuels without compromising financial stability.

This development arrives less than a year after research found that no major banks had committed to stopping funding for new oil, gas or coal projects entirely. A report published in October by the TPI Global Climate Transition Centre at the London School of Economics and Political Science suggested that many institutions which updated their climate policies subsequently weakened them.

The study analysed thirty-six of the largest banks globally and found they remain at an early stage of transition with decarbonisation targets covering limited sectors. It observed that disclosures regarding net zero commitments and financing conditions for high-emission areas had been diluted, often substituting firm language like commitment or target with ambiguous wording such as ambition.

Despite some hesitation among major lenders to stop funding new fossil fuels entirely, over two hundred globally significant financial institutions have adopted formal divestment policies restricting investment in thermal coal mining and power projects. As more banks view long-term investment in polluting assets as increasingly risky, the trend suggests greater involvement with alternative energy sources may follow in coming years.