By David Milliken

LONDON (Reuters) -The Bank of England set out plans on Friday to use its 20 billion pounds ($28.4 billion) of corporate bond holdings to nudge companies to cut greenhouse gas emissions faster, part of a wider government strategy to achieve net-zero emissions.

The BoE said it was the first central bank in the world to take steps that could ultimately see the most polluting companies banned from its bond portfolio.

It will give firms time to reduce carbon emissions rather than immediately selling off its holdings in energy companies, power utilities and miners.

"Divestment is a powerful tool, and should remain squarely in the toolkit. But it should be used as a credible threat to reinforce incentives, not an indiscriminate 'quick fix'," BoE executive director for markets Andrew Hauser said.

The BoE owns about 6.5% of the sterling corporate bond market, after doubling its holdings last year as it restarted asset purchases to support Britain's economy through the coronavirus pandemic.

Although this is a relatively small share, the BoE hopes its actions will serve as a benchmark for other investors. The central bank will launch its first 'stress test' of British banks' and insurers' exposure to climate change next month.

Climate change has become a greater focus for Britain's government this year as it prepares to host the United Nations COP26 climate summit in Glasgow in November.

In March, finance minister Rishi Sunak changed the BoE's policy mandate to require it to support a government commitment to shift towards an economy with net zero carbon emissions by 2050.

The BoE's decision got cautious backing from Positive Money, a think-tank which has campaigned for the BoE to take greater account of the social and environmental impact of its policies.

"To meaningfully put its new mandate into practice, the Bank must rapidly take measures to steer lending in a sustainable direction, by penalising dirty lending and incentivising green alternatives," Positive Money economist David Barmes said.

Hauser, speaking at an event hosted by Bloomberg, said the BoE would set out detailed investment criteria after a consultation ends in mid-July, and before a planned reinvestment of maturing bonds in the final three months of this year.

Bonds previously classed as eligible for purchase included those of energy giant BP, mining company Rio Tinto and carmakers Volkswagen and Daimler.

Under the new proposals, the BoE will set targets for the overall carbon emissions of its portfolio and favour businesses which are making faster progress at reducing their own.