The Bank of England has announced it will no longer accept bonds linked to thermal coal as collateral for key loan arrangements, marking a significant victory for climate campaigners. This policy, effective from October, targets one of the most polluting industries by restricting how commercial banks use coal-linked assets when borrowing from the central bank.
Why the Bank of England Is Cracking Down on Thermal Coal
Thermal coal, burned in power plants for electricity, has long been a focus of green activists due to its high carbon emissions. The Bank’s new stance suggests these bonds are now considered too risky for its balance sheet, as the global shift toward renewable energy could devalue them. According to Ellie McLaughlin of Positive Money, this move sends a strong signal to both central banks and financial markets.
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Impact on Commercial Banks
Major banks like Barclays, Lloyds, NatWest, and HSBC regularly borrow from the Bank of England to ensure smooth transaction settlements. They must provide collateral, typically bonds, as a guarantee. With the new ban, these banks can no longer use thermal coal bonds, forcing them to reconsider their holdings in this sector. About 150 global financial firms already restrict coal-related business, per Reclaim Finance data.
| Policy Element | Details |
|---|---|
| Effective Date | October 2025 |
| Collateral Type Banned | Bonds linked to thermal coal |
| Affected Institutions | Commercial banks like Barclays, Lloyds, NatWest, HSBC |
| Reason | Financial risks from net zero transition |
Key Takeaways for Investors and Activists
- Thermal coal bonds are now deemed too risky for central bank collateral.
- The policy aligns with global efforts to achieve net zero emissions.
- Commercial banks may accelerate divestment from coal assets.
- Activists see this as a precedent for other central banks.
The Bank of England stated that thermal coal companies face potential financial risks due to economic adjustments toward net zero. This move could pressure banks to shift investments to greener alternatives, reducing the financial viability of coal projects worldwide.
FAQ
What does the Bank of England's new policy mean for coal bonds?
The Bank of England will no longer accept bonds linked to thermal coal as collateral when commercial banks borrow money, signaling a shift away from fossil fuel financing.
Which banks are affected by this change?
Major UK commercial banks like Barclays, Lloyds, NatWest, and HSBC are directly affected as they use such bonds for collateral in central bank loans.
Why is thermal coal considered risky for central banks?
Thermal coal assets face devaluation risks due to the global transition to net zero emissions, making them unsuitable for central bank balance sheets.
This policy is a clear indicator that financial regulators are prioritizing climate risks. As the world moves toward sustainable energy, coal-linked investments may continue to lose favor, reshaping the banking and energy sectors.
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