Bank of England calls on banks and insurers to step up climate risk oversight

The Bank of England (BoE) will today step up calls for financial institutions to better manage climate risks, with the release of formal recommendations detailing how banks and insurers should identify a senior executive for managing climate-related risks.

In what is thought to be the first such move by a central bank anywhere in the world, the BoE’s Prudential Regulation Authority (PRA) is reportedly set to publish a draft supervisory statement instructing companies to ensure a senior figure is in place who can report to the board on climate-related risks and opportunities.

The bank is poised to warn that a failure to strengthen climate risk governance arrangements could resultin tougher regulations and the risk of penalties.

The move is the latest in a string of interventions from central banks to encourage more businesses to enhance their climate risk disclosure and will fuel speculation that reporting in line with the recommendations of the Taskforce of Climate-related Financial Disclosures (TCFDs) could become mandatory.

Only last week 18 central banks, including those of England, Germany, France, Japan and China, issued a statement warning financial risks arising from climate change are “system-wide and potentially irreversible if not addressed”.

It also comes in the wake of green law group ClientEarth writing to a number of regulators and listed firms to warn legal action could soon follow if they fail to strengthen their climate risk disclosure practices.

Dr Ben Caldecott, founding Director of the Oxford Sustainable Finance Programme at the University of Oxford, said the recommendations from the PRA were part of a wider trend.

“The Bank of England is making clear that supervisory expectations are changing and that the regulator will now be factoring climate-related risk explicitly into different aspects of banking and insurance supervision,” he said in a statement. “This is a logical next step as the Bank of England has repeatedly highlighted the potential risks to firm solvency and financial stability from climate change. Other regulators in the UK, such as the Financial Conduct Authority, as well as regulators internationally, will almost certainly follow suit.”

He also stressed that ensuring senior executives take responsibility for managing climate-change risks and face board-level accountability for doing should “undoubtedly spur greater action”. “Financial institutions now need to develop credible and robust plans for measuring and managing climate-related risks,” he advised. “Among other things, they need to determine what analytical capabilities they require and how they intend to resource them.”

Jon Williams, PwC Partner and a member of the TCFD, said significant changes were required across the banking and insurance sectors in response to the new recommendations.

“It’s encouraging that some banks and insurers are now taking climate-related financial risks seriously, but there’s still lots of progress to be made to ensure resilience through the transition to a lower-carbon economy,” he said. “The PRA’s own survey shows that whilst 70 per cent of banks see climate change as a financial risk, only 10 per cent of them are managing these risks comprehensively. The TCFD status report, published last month, also shows that the majority of banks are not disclosing on climate governance and find it challenging to integrate climate change into business strategy and risk management.”

The intervention comes as a number of banks and financial institutions responded to last week’s IPCC report on the urgent need for deep and rapid decarbonisation by warning investment markets would have to transform over the coming decades.

A note from banking giant UBS said investors could support the IPCC report’s recommended goal of delivering a net zero emission global economy by 2050 by pursuing attractive renewable energy investment opportunities, supporting the transition to electric cars, and backing green financial instruments.

“By choosing sustainable investing options, investors can contribute to the reduction of carbon emissions, along with other positive goals, without sacrificing economic returns,” the note stated. “Green bonds, typically, have the same seniority as conventional bonds, yet their investment proceeds are ring-fenced for green projects, such as carbon reduction. BlackRock finds that a $1m investment in the bonds that form the Bloomberg Barclays MSCI Green Bond index represents over 2,000 tonnes of CO2 avoided, in addition to over 88 million litres of water saved, and other positive contributions.”

Separately, credit ratings agency Moody’s launched a new quarterly Environmental, Social and Governance (ESG) themed research compilation – dubbed ESG Focus – which will pool together the agency’s ESG research and green bond assessments.

And investment management firm Brooks Macdonald last week launched a new Responsible Investment Service, which will offer clients investment strategies that either avoid certain companies or sectors or seek to step up support for firms with strong ESG track records.

Meanwhile, the Natural Capital Finance Alliance (NCFA) published a report last week – entitled Connecting Finance and Natural Capital: A Supplement to the Natural Capital Protocol – which provides advice on how investors can better assess their impact on natural capital.

The latest green investment developments come against a backdrop of further reminders of the huge scale of the reforms that will be required to deliver a genuinely sustainable investment community.

A separate report last week from the US non-profit Consumer Watchdog revealed the top 10 US insurance companies continue to hold $51bn in fossil fuel assets, while eight out of 10 have not altered their investment strategies in any way to address escalating climate risks.

The report came as a new coalition of public-interest groups came together under the banner Insure Our Future to call on US insurance companies to divest from coal and tar sands companies.