Bank of England’s trillion-dollar warning on climate change

Written by

Tim Greenhalgh

Posted on

April 25, 2019

The Bank of England has sent its clearest and most chilling message yet to financiers and insurers on the dire economic consequences of climate change.

As the Climate Rebellion protestors in London raised awareness and demanded action, the Bank made two key interventions in the debate. First, Sarah Breeden, executive director of International Banks Supervision warned of the need for urgent reform in a speech at the Official Monetary & Financial Institutions Forum in the capital.

Then the Bank’s governor, Mark Carney published an open letter with François Villeroy de Galhau, governor of the Banque de France urging financial regulators, banks and insurers around the world to “raise the bar” to avoid catastrophe.

The dire warnings came at the same time as a new study was published which indicated that the release of methane and carbon dioxide from thawing Artic permafrost will add $70 trillion (£54tn) to the world’s climate bill.

Minsky moment

The force and depth of argument used by Sarah Breedon and her boss is unusual for the Bank and signals in the clearest possible terms that it expects the financial sector to incorporate climate change into corporate governance, risk management analysis, forward planning and disclosure policies.

Breedon warned that unchecked climate change could trigger a “Minsky moment” – named after the economist Hyman Minsky – in the financial markets. This would see an abrupt drop in asset prices, with losses of up to $20 trillion (£15.3tn).

She focused on two areas of risk:

“Physical risks from damage to property, land and infrastructure from catastrophic weather-related events and broader climate trends such as heatwaves, hurricanes, droughts, floods and rising sea levels.

“Transition risks arise from changes in climate policy, technology and market sentiment as we adjust to a lower-carbon economy. The need to transition is widespread, affecting not only energy companies but also transportation, infrastructure, agriculture, real estate to name just a few.”          

Sailing into a storm

In the speech, Breedon also underlined the seriousness of the Bank’s position by reflecting that the global financial system was sailing into a storm with no charts to guide it to the favoured low-carbon economy targeted by the 2015 Paris agreement.

Breedon said:

“Getting us to our destination requires an understanding of what risks lurk in these deep waters and what future winds may buffet us, so we can make better decisions today. We need more data, greater disclosure, better analytical toolkits, advanced scenario analysis and new risk management techniques to help identify the hidden dangers on our journey.

Of course there are opportunities potentially in front of us, too. Financing that orderly transition to a low carbon economy holds the promise of favourable tailwinds and smooth sailing.”

While a group of central banks – the Network for Greening the Financial System (NGFS) – would be the experienced “crew” on the voyage, she said that the Bank also expected financial firms to act right now against far-reaching but foreseeable great risks that would affect everyone, all sectors and all geographies.

Breedon continued:

“The size of those future risks will be determined by the actions we take today. The carbon released today is creating the physical and transition risks of tomorrow. Climate change therefore represents the tragedy of the horizon: by the time it is clear that climate change is creating risks that we want to reduce, it may already be too late to act.”

To that end, the Bank is the first regulator globally to publish “supervisory expectations” for the  banks and insurance companies it oversees. It has set up the UK Climate Financial Risk Forum (CFRF), co-chaired by the Prudential Regulation Authority and the Financial Conduct Authority. A key part of the process would be the need for full corporate disclosure on climate-change risks.

Substantial opportunities

Over the next year, the CFRF will guide the process of drawing up the detailed charts needed for the voyage through the financial storms ahead, matching need with innovation. However, initial actions are expected from the sector by October.

The move to the low-carbon economy is expected to need investment of around $90 trillion by 2030 but she said that “this presents substantial opportunities for the financial sector to develop new products and services to mainstream green finance.”

Breedon concluded by likening the financial system to super-tankers rather than high-speed catamarans, which meant acting now and not “waiting for the storm to hit”.

 “We need to work together internationally and domestically, private sector and public sector, to achieve a smooth and orderly transition. The window for that orderly transition is finite and closing. And our work to seize that opportunity could not be more important. Indeed it is not an overstatement to say that the future of our planet depends on it.” Said Breedon.

Full text of Sarah Breeden’s speech on climate-change risks

Mark Carney’s open letter on climate action

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