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Home > Climate change, green finance and financial stability
 

Climate change, green finance and financial stability

We are now actively considering the financial impact of climate-related risks on our statutory objectives. This includes the role of central banks and financial regulation in addressing financial stability risks from climate change and supporting an orderly market transition to a lower carbon, environmentally sustainable economy. In his Arthur Burns Memorial lecture, in September 2016, Governor Carney outlined some of the key issues involved.

Our work was initially focused on insurance, but has since broadened to include a number of other topics as outlined below.

Insurance supervision

In September 2015, the Prudential Regulation Authority (PRA) published a report on the impact of climate change on the UK insurance sector, alongside Bank of England Governor Mark Carney’s speech, ‘Breaking the tragedy of horizon – climate change and financial stability’. The report identified three types of climate-related financial risk:

  1. Physical:  risks that could arise from climate and weather-related events, such as floods and storms, which can damage property or disrupt trade.
  2. Transition: risks that could arise from the process of adjusting to a lower-carbon economy, such as changes in policy, technology, or investor sentiment.
  3. Liability: risks that could arise from parties who have suffered loss or damage.

The PRA continues to consider climate-related risks through a mix of supervisory activities, research, dialogue and engagement and international collaboration.

Bank research on climate change

In February 2015, we launched our One Bank Research Agenda, which outlined our research priorities. Under the theme ‘Response to fundamental change’, we identified the impact of climate change and the role of central banks in addressing systemic environmental risks as an area which requires further research. 

Activities in this area to date include:

In May 2016, we published a Staff Working Paper which examined the channels via which climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary and financial stability objectives.

In July 2016, we jointly held a workshop with the Met Office on climate risk and financial stability.

In November 2016, we held a joint conference on 'Central banking, climate change and environmental sustainability’ with the Council on Economic Policies.

Disclosing climate-related risks

To allow markets to better assess, price and manage climate-related risks, the Financial Stability Board (FSB) has, at the request of G20 leaders, established the industry-led Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg.  Its goal is to promote voluntary, consistent, comparable, reliable and clear disclosures around climate-related financial risk. Access to better-quality information will allow market participants to better understand and manage these risks. And an early understanding can, in turn, help promote a smooth, orderly market transition to a lower carbon economy.

The TCFD is industry-led under the sponsorship of the FSB. Its work and recommendations for disclosure were published for consultation in December 2016; the consultation closed on 12 February 2017. 
 
Governor Carney, who is also Chairman of the FSB, gave remarks at the launch event of the TCFD recommendations.

Green finance

On behalf of the United Kingdom, the Bank co-founded and is co-chairing the G20 Green Finance Study Group (GFSG) with the People’s Bank of China, and the UN Environment (UNEP) Inquiry as secretariat. Recognising the need to scale up green finance and to deploy tens of trillions of dollars over the coming decade, the Study Group’s mandate is to ‘identify institutional and market barriers to green finance and, based on country experiences, develop options on how to enhance the ability of the financial system to mobilize private capital for green investment’.

Working closely with HM Treasury, the Bank co-chaired four study group meetings during 2016 and supported a range of related private-sector events. The Study Group’s Synthesis Report was welcomed at the July 2016 G20 leaders’ summit Chengdu, China and was published at China’s G20 Summit in September 2016.

Under German presidency in 2017, the two areas of research of the GFSG are advancing the integration of environmental risk analysis (ERA) into the financial system and identifying publically available environmental data (PAED) that can be applied within risk analysis models.

In addition to the G20 work, the Bank is actively engaging in operationalising green finance tools, such as ways to advance Green Bonds. Bilaterally between UK and Chinese market stakeholders, as well as with other private sector stakeholders to promote best practices for issuing Green Bonds.

Reducing the Bank’s environmental impact

We are also committed to running our own operations responsibly and sustainably. Our Greener Bank programme is aimed at reducing the environmental impact of our day-to-day operations.

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