14 The evidence for this is discussed in more detail in Section 2 of the Discussion Paper. 13  6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  Chart 6: Shadow carbon price in scenarios shown in Chart 2  Source: IIASA [NGFS Climate Scenarios Database, using marker models]  The question is not whether the shadow carbon price has to rise – the question is when. To the extent that markets are assuming an unrealistically low or distant pickup – and it seems increasingly clear that they are – financial assets today may be mispriced. An ‘adjusted market neutrality’ principle that took this mispricing into account could suggest a very different asset allocation in investment portfolios, including the CBPS. Until recently, the Bank of England lacked the mandate to make such adjustments. In March, however, the Chancellor updated the MPC’s ‘remit letter’ to confirm that the economic strategy of the Government – which the MPC is required to support as a ‘secondary objective’ – includes supporting the transition to a net zero emissions economy.15  Portfolio decarbonisation is not enough: look forward, work together to drive change  Now comes the tricky bit: translating these conceptual insights into practice. At first sight it might seem the answer is simple: just sell all our high-emission bonds, and use the proceeds to buy low-emission ones. The carbon footprint of the CBPS would fall sharply.

That movement is strong and growing. Earlier this year, the Network for Greening the Financial System (NGFS), a group of 90 central banks and supervisors which the Bank helped to found, published a  17  https://www.parisalignedinvestment.org/media/2021/03/PAII-Net-Zero-Investment-Framework_Implementation-Guide.pdf; https://www.unepfi.org/net-zero-alliance/resources/alliance-2025-target-setting-protocol/; https://sciencebasedtargets.org/sectors/financial-institutions 9  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  9  menu of practical options for central banks looking to green their monetary policy operations.18 The recent podcast by ECB Executive Board members Isabel Schnabel and Frank Elderson makes very similar points to my speech today.19 And in the private and non-profit sectors, comprehensive frameworks for investment strategies to support net zero have been developed by owners and managers of assets worth tens of trillions of dollars (Table 2). Now that is real money. We’ve drawn heavily on this thinking in designing our own framework. We hope our approach can, in turn, influence, encourage and promote the efforts of others. Turning our words into action: greening the CBPS  So what are we going to do? Our proposed framework is made up of four key tools: targets; tilts; eligibility; and escalation (Table 3). Let me describe each briefly Table 3: Proposed tools for greening the CBPS  18  ngfs_monetary_policy_operations_final.pdf Tackling climate change as a central bank: Between motivation, obligation and limitation (europa.eu). See also François Villeroy de Galhau: The role of central banks in the greening of the economy (bis.org) and Speech Klaas Knot - “Getting the Green Deal done: how to mobilize sustainable finance” (dnb.nl) for other recent examples.