And, to the extent the Bank’s actions were influential, the financing costs of high-emissions firms should rise, sending a powerful wakeup call. But indiscriminate ‘portfolio decarbonisation’ of this kind cannot be the best strategy for investors like the Bank seeking to incentivise economy-wide transition to net zero, for two key reasons:  15  MPC Remit statement and letter and FPC Remit letter | Bank of England 7  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  7    First, the high-emissions firms whose bonds we would be selling are the ones we most need to be at the vanguard of emissions reduction. But selling their bonds doesn’t destroy them as assets, it simply transfers them to other investors. And if investors seeking to incentivise transition are all decarbonising, those left holding the bonds are by definition going to be those with a weaker commitment to net zero;    Second, simply selling anything with a high carbon footprint penalises those with strong and credible emissions reductions plans just as much as it does those with no such plans. The net effect therefore is likely to be to reduce, not increase, economy-wide incentives to reach net zero.16 And our end state portfolio, consisting exclusively of firms with low and stable emissions, would by definition play little material role in driving future emissions reduction. I draw two conclusions from this. First, engagement beats disengagement.

This approach, sometimes called ‘market neutrality’, has obvious attractions for central banks charged with setting monetary policy for the economy as a whole. But it has quite a striking implication for the carbon footprint of the CBPS portfolio. Chart 5 compares the proportion of the CBPS held in each sector with the contribution of that sectoral holding to the total carbon footprint of the portfolio. And you can immediately see that some sectors – notably the utilities: electricity, water and gas – contribute more to the CBPS’ carbon footprint than their portfolio share might suggest. Others by contrast contribute substantially less – eg the consumer, communications, property and finance sectors. 12  A full set of eligibility criteria can be found here: https://www.bankofengland.co.uk/markets/market-notices/2016/asset-purchasefacility-corporate-bond-purchase-scheme-market-notice-september-2016. Financial risks on the CBPS, like the Asset Purchase Facility as a whole, are indemnified by HM Treasury. 5  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  5  Chart 5: CBPS sectoral composition and carbon footprint13  There are at least two reasons for this apparent bias. The first is that – for reasons unrelated to emissions – investment grade corporate bond issuance tends to be better suited to companies with big fixed long-term capital investment needs (and on average larger carbon footprints). By contrast, smaller companies (with on average lower carbon footprints) are more likely to rely on funding from banks or other sources. Debt issuance therefore tends to be skewed towards sectors with higher carbon footprints, relative to their shares of GDP.