Climate change will affect the UK economy, including the financial system. Our job is to keep the financial system stable as the UK moves to a net zero economy. So we work to:
- build the resilience of UK banks and insurers
- tackle risks that emerge from the move to net zero
- support the global effort on climate change
Why is it important that banks and insurers manage risks that climate change brings?
Climate change increases the risks for companies that provide loans or insurance for people. It’s important they manage these risks or their businesses could be left exposed.
Let’s take a company that provides insurance against flood damage. It’s likely that climate change will mean more floods, and more of those floods are likely to be severe. So companies providing this may need to pay out more to their customers. And that could leave the insurer exposed.
There’s also risks for banks. Let’s say a bank has lent money to a coal mining company. The government might introduce new climate rules that restrict coal mining. Or it may make it more expensive to mine coal. If that happened, the coal mining company could default on its loan. And that could leave the bank exposed.
We want to make sure banks and insurers in the UK identify risks like these and manage them well. To help them be more prepared, we’ve set out what they can do to manage their risks better.
How do we keep the UK’s financial system stable in the face of climate change?
A stable financial system is one that can provide crucial services to households and businesses in good times and bad. Climate change creates risks for the financial system as a whole. And the UK’s move to a net zero economy also brings challenges. We are focused on making sure we understand both these things and plan ahead so we can help to manage them.
One way we do this is to get people who work for banks and insurers to really think about what might happen as a result of climate change. We want them to understand what different kinds of things might happen. And we want them to be prepared for these things.
One thing we ask them to think about is the effect of higher global temperatures on their businesses and customers. We ask them to think about how they would manage this difficult situation.
When we do this we are not only thinking about individual firms. We are also thinking about the UK’s financial system as a whole. It helps us to understand where it is most vulnerable and what we can do to make it more resilient.
How does the Bank of England support the move to net-zero greenhouse gas emissions?
One of the main ways we support the move to ‘net zero’ is to help UK banks and insurers to look at and manage the risks they face from climate change. One way a bank can reduce its own risks is if it helps its business customers to invest in reducing greenhouse gas emissions.
We also support the move by asking companies to be more open. We want them to be more open about how they affect the environment. And we want them to be more open about the climate risks they face. Doing that helps:
- investors to decide which companies to invest in
- consumers to decide which goods and services to buy
- governments to decide what policy action to take
We lead by example. Each year, we publish our own climate disclosure.
We all know climate change needs an international response. So we helped to set up the Network for Greening the Financial System. This is a network of central banks (we are the UK’s central bank) and regulators (we are one of the UK’s financial regulators) from around the world. It shares information, research, and experiences. By learning from each other, we can help to tackle climate change globally.