Bank of England tells banks to quantify climate risks

Bank of England executive director Sarah Breeden said that by 2050, banks and insurers are underestimating the potential impact of climate change on their business and should quantify risks from targeting net zero carbon emissions. For companies that face physical risks like fires and floods due to climate change, the banks and insurers hold assets such as stocks and bonds. It also includes that are exposed to costs of transition to a low-carbon economy.

Breeden said in a speech that it is critical that financial firms recognise now that the race to net zero has started. In support of their ambitions, and consistent with their expectations, they need to run climate scenarios as part of business-as-usual risk management and embed climate risk management within day-to-day decision-making. She also said that the Green swans or sudden market shifts due to climate change were likely until the management of risks greatly improves.

Climate activists have protested against HSBC and Barclays. This urges them to stop financing investments in fossil fuels. Breeden said that she doesn’t think immediate divestment is part of an economy-wide solution. These scenario analyses would help banks better spot companies. She also said that the Network for Greening the Financial System (NGFS), a grouping of central banks, has compiled scenarios for banks to use and compare results.

The price of carbon should be as fundamental to investment decisions as interest rates. The Britain’s new carbon market following Brexit could be volatile. This makes it harder to rely on. The BoE will launch its first climate-related stress test of banks and insurers. This is to assess business model changes, but it won’t translate the outcome into any capital changes. Breeden said that the main incentive for the economy to adapt to climate change was government policy rather than back-seat driving like imposing punitive capital charges or granting capital relief.