BoE Integrates Net Zero Transition Risk into Collateral Framework

The Bank of England (BoE) issued a new Market Notice outlining changes to its collateral eligibility framework, including, for the first time, the integration of climate transition-related risk factors into its methodology for valuing corporate bonds pledged by banks as collateral.

The BoE’s collateral eligibility framework sets out the assets that banks can use as collateral when borrowing from the central bank through its lending facilities. As a risk protection measure, the central bank applies discounts, or “haircuts” to the value of the assets pledged as collateral, integrating factors such as the type of asset and its risk profile, reducing the amount that can be borrowed against them.

In its new market notice, the BoE said that it is revising its methodology for calculating haircuts on corporate bonds, and noted that “issuers can be exposed to potential financial risks connected to the adjustment of the economy towards net zero.” To reflect the transition risk, the central bank said that it will begin applying “haircut add-ons” to corporate bonds from issuers in relevant sectors, with the change set to come into effect from the end of October 2026.

In addition, the BoE said in its notice that bonds that are issued by companies that derive revenue from thermal coal mining will not be eligible as collateral.

The BoE’s notice follows a similar move last year by the European Central Bank (ECB), with the announcement of plans to add a climate factor within its collateral framework to protect against potential decline in value of collateral in event of adverse climate-related transition shocks.