Climate change

Climate change, and society’s response to it, present risks relevant to the Bank’s objectives. The Bank is carrying out ongoing work to embed climate change into financial decisions and macroeconomic analysis.

Latest updates

18 December 2019: We published a discussion paper setting out the proposal for the 2021 Biennial Exploratory Scenario on climate-related risks. The objective is to test the resilience of the largest banks, insurers and the financial system to different possible climate pathways and provide a comprehensive assessment of the UK financial system’s exposure to climate-related risks. The response period closes on 18 March 2020.

12 August 2019 and 18 December 2019: We published the minutes for the second and third meetings of the PRA and FCA joint Climate Financial Risk Forum.

11 July 2019: We published plans to test the UK financial system’s resilience to the risks from climate change as part of the 2021 Biennial Exploratory Scenario. This was set out in the July Financial Stability Report.

Our response to climate change

The Bank’s response to climate change is motivated by its statutory objectives. The first involves promoting safety and soundness by enhancing the PRA’s approach to supervising the financial risks from climate change. The second involves enhancing the resilience of the UK financial system by supporting an orderly market transition to a low-carbon economy. We first set out our strategy for responding to these risks in an article published in the June 2017 edition of our Quarterly Bulletin.

We set up the Future of Finance project to look at how financial services might evolve over the next decade, and what this could mean for everyone who uses, provides or regulates them. Huw van Steenis led the review and published his findings and recommendations in June 2019. This included the recommendation for the Bank to promote the smooth transition to a low carbon economy. The Bank set out its response to that review and committed to take action to support an orderly transition.

 

The Governor of the Bank of England, Mark Carney, the executive sponsor of the Bank’s work in this area, Sarah Breeden, and other Bank seniors have discussed the financial risks from climate change and the Bank’s response in various speeches.

Speeches on climate change

 

Prudential supervision and climate change

The Bank’s initial focus was on the impact of climate change on the insurance sector, and the PRA published a report in September 2015.

PDFThe impact of climate change on the UK insurance sector

Subsequently, the Bank completed a review of the impact on the UK banking sector, which was published in September 2018. The report highlighted that a transition in thinking is taking place across the sector from viewing climate change as a potential reputational risk to a core financial and strategic risk.

Transition in thinking: The impact of climate change on the UK banking sector

Building on the insurance and banking reviews, in April 2019, the PRA published Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’. This SS was published alongside Policy Statement 11/19, addressing the responses to CP23/18.

Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’

The PRA has established a Climate Financial Risk Forum (CFRF) to build intellectual capacity and share best practice, co-chaired with the FCA. The CFRF brings together senior representatives from across the financial sector, including banks, insurers, and asset managers. The forum has set up four working groups to produce practical guidance on four specific topic areas: risk management, scenario analysis, disclosure, and innovation. The final outputs will be shared with industry more widely.

Full background and information for the launch of the CFRF and summaries of subsequent meetings are available here:

Working with a group of representatives from the general insurance sector, in May, the PRA published the report ‘A framework for assessing financial impacts of physical climate change. A practitioner’s aide for the general insurance sector’. The paper outlines a framework for practitioners to use to assess climate-related financial risks, using tools that are already available within the general insurance sector. The framework is intended as a possible starting point for firms to assess the impacts in the context of their business decisions and disclosure requirements.

Stress testing and climate change

The Bank is utilising its stress testing framework to assess the impact of climate-related risks on the UK financial system. 

In June 2019, the PRA published details of its Insurance Stress Test for 2019, which included an exploratory exercise in relation to climate change. The set of climate scenarios explored the impacts to both firms' liabilities and investments stemming from physical and transition risks.

Building on the Insurance Stress Test, the Bank announced plans to test the UK financial system’s resilience to the financial risks from climate change as part of the 2021 Biennial Exploratory Scenario. This was set out in the July Financial Stability Report.

In December 2019, the Bank published a discussion paper setting out the proposal for the 2021 Biennial Exploratory Scenario (BES) on climate-related risks. The objective of the BES is to test the resilience of the largest banks, insurers and the financial system to different possible climate pathways and provide a comprehensive assessment of the UK financial system’s exposure to climate-related risks.  

The Bank is using the discussion paper to seek feedback relevant stakeholders on the design of the exercise. This includes financial firms, climate scientists, economists, other industry experts. The Bank is seeking responses by 18 March 2020.

Discussion paper: The 2021 biennial exploratory scenario on the financial risks from climate change

International climate-related initiatives

Central Banks and Supervisors Network for Greening the Financial System (NGFS)

The Bank of England is a founding member of the Central Banks and Supervisors Network for Greening the Financial System. The Network was formed in December 2017, at the One Planet Summit in Paris. It was co-founded by eight central banks and supervisors, and, as of June 2019, has over 40 members and observers.

The Bank chairs the NGFS workstream looking at sizing the risks from climate change to the financial system and macroeconomy. It actively contributes to the other workstreams on supervision of climate-related risks and scaling up green finance. In January 2019, the Bank hosted an NGFS conference on ‘the macroeconomic and financial stability impacts from climate change.’

In April 2019, the NGFS published its first comprehensive report, ‘A call for action – climate change as a source of financial risk’. This followed publication of its ‘First Progress Report’ in October 2018. The report sets out six recommendations for central banks, supervisors, policymakers and financial institutions to enhance their role in the greening of the financial system and the managing of climate and environment-related risks. Alongside the report, Mark Carney, Governor of the Bank of England, Francois Villeroy de Galhau, Governor of the Banque de France, and Frank Elderson, Chair of the Network for Greening the Financial System (NGFS) wrote an open letter on climate-related financial risks.

Sustainable Insurance Forum

The Bank also co-founded the Sustainable Insurance Forum (SIF). SIF is a global network of insurance supervisors and regulators, who are working together on sustainability challenges facing the insurance sector, including climate change.

Supporting enhanced disclosure

To allow markets to better assess, price and manage climate-related financial risks, the Financial Stability Board (FSB), at the request of G20 leaders, established the industry-led Task Force on Climate-related Financial Disclosures (TCFD). The Bank supports the TCFD, and has, for example, co-hosted a conference on scenario analysis in November 2017. 

The Bank has also committed to disclose an assessment of how it manages climate-related financial risks in its annual reporting, starting in 2019/20, as announced in the press release 'Bank of England to disclose assessment of how it manages climate-related financial risk in the 2019/20 annual report’. This disclosure will mirror the framework of the TCFD, setting out how the Bank integrates climate-related financial risks across its balance sheet and processes. 

Research on climate change

The Bank has engaged in several research activities on climate change. 

In May 2016, we published a Staff Working Paper on the impact of climate change on central banks. It examines 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 held a joint workshop with the Met Office on climate risk and financial stability.

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

In January 2018, we published a Staff Working Paper on climate change and the macro-economy. The review focused on the key theoretical and empirical modelling issues in the analysis of the macroeconomic risks deriving from climate change.

In May 2018, we published a joint article in Nature Climate Change on the climate change challenges for central banks and financial regulators. The paper presents the key controversies in the central banks and regulators’ response to climate change, and discusses potential areas for future research and policy.

In October 2018, we published a Bank Underground article on the relationship between mortgage arrears and property energy ratings. Analysing borrower-level data, the research suggests that mortgages on efficient properties are less risky.

Reducing our 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.

Corporate responsibility at the Bank

 
This page was last updated 18 December 2019
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