Bank of England to Apply Climate Transition Haircuts to Corporate Bond Collateral

The Bank of England issued a Market Notice announcing changes to its collateral framework, including the first-ever integration of climate transition-related risk into its methodology for valuing corporate bonds pledged as collateral by banks. Haircut add-ons will apply to corporate bonds from issuers in relevant sectors from the end of October 2026, and bonds from thermal coal mining companies will become ineligible as collateral.

The Bank of England's collateral eligibility framework sets the assets that commercial banks can pledge when borrowing from the central bank, with haircuts applied to reduce the value attributed to each asset as a risk protection measure. The new framework revises haircut calculations on corporate bonds to reflect that issuers in certain sectors may face financial risks connected to the economy's adjustment toward net zero. The central bank cited the potential for climate transition risks to affect the value of corporate bond collateral in adverse scenarios.

The move follows a similar announcement by the European Central Bank in 2024 of plans to incorporate a climate factor within its collateral framework to protect against potential value declines in event of adverse transition shocks. By embedding transition risk into haircut calculations, central banks are signalling to capital markets that climate transition risk is a systemic financial risk that must be reflected in risk management frameworks, not merely a reporting or reputational issue.

The exclusion of thermal coal mining company bonds from collateral eligibility takes the BoE framework a step further, representing a direct restriction on the use of fossil fuel-related assets as central bank collateral. For Indian banks and financial institutions that engage with the Bank of England's facilities or look to it as a regulatory model, the framework change indicates a direction of travel for central bank climate risk integration. The change takes effect from the end of October 2026.

Key figure — Haircut add-ons on corporate bonds from relevant sectors effective end of October 2026