By Paul Davies and Michael Green

On 16 June 2017, the Bank of England (BoE) published an article setting out its response to climate change, explaining that climate change and society’s response to it presents certain financial risks. These risks arise through two main ways:

  • The physical effects of climate change such as droughts, floods and storms.
  • The impact of changes associated with transitioning to a lower carbon economy such as (i) developments in climate policy (ii) new disruptive technologies or (iii) the changing priorities of investors.

The BoE’s approach in mitigating the financial risks from climate change has two elements:

  • Actively engaging with firms that have climate related risks such as segments of the insurance industry. The BoE is “deepening” its work here, focusing on the insurance sector and starting to work in the banking sector.
  • Improving the resilience of the UK financial system by engaging with initiatives to support a smooth market transition to a low carbon economy. This includes taking a proactive interest in the Financial Stability Board’s (FSB) private sector on climate related financial disclosures (TCFD), co-chairing the G20 green finance study group on behalf of the UK and co-ordinating with other insurance regulators in the Sustainable Insurance Forum (SIF). The BoE is consolidating this international work by (i) liaising with other financial regulators and engaging with the private sector on climate related issues and (ii) considering related research and analytical work, such as reviewing frameworks for understanding the impact of climate change on the wider community.

It is envisaged that forming such a strategic response to the financial risks from climate change will help to ensure that the BoE can fulfil its mission to maintain monetary and financial stability, both now and in the long term.

The BoE’s renewed focus on the impact of climate related financial risks is against the broader context of similar actions being taken by central banks and financial regulators globally and by the wider international community. For example, the European Systemic Risk Board (ESRB), Dutch and Swedish financial authorities and Germany Ministry of Finance are carrying out research to examine the financial risks arising from climate change. It is evident therefore that the concept of climate change being a “material financial risk” is becoming better understood in many areas of the corporate sector and the BoE also appears to be following this much needed cultural shift.

This post was prepared with the assistance of Ei Nge Htut in the London office of Latham & Watkins.