17  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  17  Chart 16: The ESG integration framework  Source: CFA Institute37  Chart 17 shows a range of such strategies.38 The simplest approach is a ‘screen’, in which the asset manager constructs a portfolio by including, or excluding, certain companies or sectors. Such approaches are currently popular because they can be directly linked to investors’ wishes (eg ‘no fossil fuel producers’), and require little in the way of sophisticated climate metrics. But they cannot provide much of the solution to a credible path to a carbon neutral economy. While individual investors may be able to divest, the financial  37  https://www.cfainstitute.org/-/media/documents/survey/guidance-case-studies-esg-integration.ashx The Investment Association’s Responsible Investment Framework provides an alternative taxonomy: https://www.theia.org/sites/default/files/2019-11/20191118-iaresponsibleinvestmentframeworkglossary.pdf  38  18  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  18  system as a whole cannot. And divestment strategies based on backward-looking carbon metrics give no scope for incentivising climate-enhancing investment in high-carbon sectors. Chart 17 Strategies for integrating climate considerations in asset allocation decisions  A ‘theme’ strategy aims instead to look across sectors, constructing portfolios of assets issued by firms with a particular climate approach. Examples include firms focusing on the production of climate-enhancing technologies, firms with credible transition strategies in place, or sharing a common supply chain. Depending on the theme chosen, such strategies typically require somewhat more granular and timely climate metrics than screens. But they remain somewhat binary in composition, and can lack diversification.

Chart 7: A selection of ‘green bond’ structures  One concern sometimes expressed with this first generation of green bonds is that there are no binding requirements as to what constitutes a green project, and hence bonds may sometimes be labelled green on spurious grounds.33 There have been various attempts to address this issue, for instance the Climate Bonds Initiative’s Taxonomy and Certification Scheme34 and the European Union’s Green Bond Standard35, which set out more robust scientific criteria for identifying projects which genuinely help with climate change. The model also requires an issuer to have fairly sizeable green capital expenditures in order to issue a bond liquid enough to appeal to mainstream investors. 31  https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/Green-Bonds-Principles-June-2018-270520.pdf BIS Quarterly Review, September 2020 33 Consistent with this, researchers have so far failed to identify a near-term relationship between green bond issuance and subsequent reductions in carbon emissions (https://www.bis.org/publ/qtrpdf/r_qt2009c.htm) – though there clearly are many possible reasons for this result, not all of which suggest greenwashing. 34 https://www.climatebonds.net/standard/taxonomy 35 https://ec.europa.eu/info/business‐economy‐euro/banking‐and‐finance/sustainable‐finance/eu‐green‐bond‐standard_en 32  13  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  13  An alternative approach is to link some element of the financial return on the bond to the achievement by the issuer of a particular climate sustainability outcome, without linking the bond to specific green expenditures.