The second is that there are increasingly persuasive reasons to believe that financial markets are materially underpricing the cost of emissions, and hence climate risks.14 There are several possible reasons for this. At the most basic level, the information on which such prices are based – companies’ disclosures on emissions reduction plans and carbon footprints – is somewhat incomplete and inconsistent. But that is improving steadily. More importantly, carbon producers do not for the most part yet bear the full costs that their emissions impose on the wider economy. A key part of the transition to net zero is to internalise those costs, driving a significant increase in the so-called ‘shadow carbon price’ (Chart 6). As that happens, it will put downward pressure on the prices of assets issued by companies who have been least successful in transitioning away from high-emissions activities, increasing their cost of finance. ‘Electricity’ and ‘gas’ sectors include companies that generate, supply and distribute power; ‘industrial & transport’ includes chemical, construction and transportation companies; ‘energy’ includes companies involved in oil exploration and production; ‘consumer, non-cyclical’ includes pharmaceutical and food and beverage companies; ‘property and finance’ includes housing associations and property development companies; ‘communications’ includes telecommunications and media; and ‘consumer cyclical’ includes automotive companies, retail and tourism. Carbon footprint measured using weighted-average carbon intensity (WACI) measures of £ revenue, capturing Scope 1 and 2 emissions. Scope 3 estimates are set out in Section 2 of the Discussion Paper.
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.