Three years on from Governor Mark Carney’s eye-catching announcement that climate change is an enormous challenge for finance, the Bank of England is starting to take action. The Prudential Regulation Authority has published a draft of its expectations from the banks and insurers it regulates regarding the risk posed by climate change. However, much more could be done.
At the end of September, the PRA, which supervises the UK’s financial sector to ensure its ‘safety and soundness’, published its survey of the UK’s banking sector and its position on climate. The survey revealed that 30% of banks still see climate as just an issue for corporate responsibility, instead of the financially, economically and socially existential threat it is in reality. Only 10% of banks are doing long-term, strategic thinking on climate. The draft published today seeks to address this by requiring, among other measures, ‘clear board level engagement and responsibility for managing the financial risks from climate change.’
As Positive Money commented today to The Guardian, the new expectations are welcome, but the regulator could go further. A crucial step in greening the system is getting banks and insurers to disclose the amount of risk they are exposed to. If all the thinking done so far is right, loans to oil and gas companies are risky in a very important sense: society has to stop burning fossil fuels if there is any chance of limiting global warming, and those firms will lose most of their business.
Understanding which banks and insurers are most exposed to climate risk will make stronger regulatory action possible. It should also produce market pressure on those firms doing little to steer their strategies towards a more sustainable, less risky world. To get there, those firms need to disclose the risk they’re exposed to through financed emissions and other vulnerable assets – for instance, mortgaged houses on flood plains.
Central banks like the Bank of England should take the steps they can to pressure firms to prepare for a major shift to mandatory disclosure of climate risk. This might mean strengthening the expectations contained in the PRA’s document. So far, it includes only a tepid request to ‘consider the relevance of disclosing information.’ To go further, the Bank should lead by example and publish an assessment of the climate risk of assets on its own balance sheet.