The Bank of England will probe banks’ exposure to climate change as it steps up efforts to tackle what it says are “significant” financial threats posed by global warming.
Climate change experts said the BoE’s decision to do an internal review of the banking sector, which the central bank revealed on its website on Friday, marked a first.
“This is ground-breaking,” said Ben Caldecott, director of the sustainable finance programme at Oxford University’s Smith School of Enterprise and the Environment. “This is the first time a financial regulator has looked at climate risk in such a comprehensive way and at the banking sector in particular.”
The BoE did not spell out exactly what its new investigation would entail or if it would result in a public report, saying only that it was “initiating a review of climate-related risks in the UK banking sector”.
However, the central bank said the work would be carried out in a similar way to an assessment of insurance companies it launched in 2014. That effort included a mix of internal research, surveys and meetings with selected companies.
Climate change experts say the banking sector deserves even greater scrutiny than insurance companies because of the vast array of global loans and investments in sectors ranging from property to oil and gas exploration.
Paul Chisnall, executive director of financial policy and operations at the British Bankers’ Association, said the industry group looked “forward to engaging with the bank on their climate-related review of the UK banking sector”.
The BoE’s insurance assessment has not resulted in any significant new regulation, and it remains to be seen what the banking review will produce. But the review comes as regulators around the world step up efforts to bolster financial institutions against climate risk.
Dutch, Swedish and German authorities have been examining the potential financial threat of global warming, while California’s insurance regulator has asked large insurers to disclose the size of their fossil fuel investments and encouraged them to sell thermal coal holdings.
France has also introduced requirements for institutional investors to explain how their portfolios line up with climate change targets.
Mark Carney, BoE governor, has become a prominent figure in the emerging field of financial climate risk since his blunt 2015 warning that investors face “potentially huge” losses from climate change action.
His concern has centred on both the physical damage that large storms and extreme weather could wreak on financial assets, as well as the risk for investors that rising government action to curb climate change could make large reserves of oil, coal and gas “literally unburnable”.
Mr Carney has already helped set up an industry task force, led by former New York City mayor Michael Bloomberg, that has developed voluntary disclosure standards to give investors more information about which companies are most exposed to climate risks and which firms best placed to exploit a shift to a greener economy.
Mr Chisnall said the BBA supports the task force, although the industry group suggested earlier this year that further work is required to carry out its recommendations.
In a quarterly bulletin posted on its website, the BoE said: “If governments push ahead with climate policies, but investors do not adapt their investment strategies accordingly, misallocation will grow.”
The bulletin pointed out that insured losses from natural catastrophes have surged from an average of around $10bn a year in the 1980s to about $45bn a year so far this decade, while overall losses have increased roughly three-fold over the past 30 years.
The rise in losses is generally thought to be driven by the increasing value of property in high-risk areas such as low-lying coastal regions.
But the BoE said “climate change is becoming a significant contributing factor” for some events, pointing to Lloyd’s of London estimates that a 20cm rise in sea levels near Manhattan since the 1950s increased the losses from Superstorm Sandy by 30 per cent in 2012.
The BoE is also concerned about the risks of a shift from fossil fuels to greener energy sources. According to the central bank, the combined market capitalisation of the top four US coal producers has fallen by 95 per cent since the end of 2010, while three of the top five US companies have recently filed for bankruptcy.
“There has also been a similar, albeit less severe, valuation shift for German utilities which were seen as slow in responding to changes in domestic energy policy (towards renewables and away from nuclear),” the BoE said.
Additional reporting by Gemma Tetlow