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Adults in the room

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The Bank of England’s Prudential Regulation Authority (PRA) was set up to help safeguard the financial system.

On Monday 15th October it published a consultation on a new Supervisory Statement: “Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change”. The new statement would set out expectations for banks and insurance firms to incorporate management of climate-related financial risk into board-level governance and into organisational risk management, to use long-term scenario planning to inform strategy, and to develop an approach to disclosing financial risk. 

To explain why climate change is relevant to the security of the financial system, the Bank said:

Climate change and society’s response to it presents financial risks that are relevant to the PRA’s objectives of safety and soundness. Whilst these risks may crystallise in full over longer-time horizons, they are becoming apparent now. Firms are enhancing their approaches to managing these risks, but more need to take a forward-looking, strategic approach if financial risks are to be minimised.

This move from the Bank of England follows other recent steps including the creation of a new Climate Financial Risk Forum to be co-chaired by the Financial Conduct Authority (FCA) which also issued its own consultation on Monday. The FCA is looking at whether new regulation is needed across a range of areas including whether climate risk is adequately taken into account by pension funds, whether corporate disclosure on climate-related financial risk is adequate for investor needs, and whether financial services firms should be required to disclose climate-related financial risk. The introduction of mandatory climate risk reporting requirements is likely to be required if companies and financial firms are to take climate change seriously: less than 10% of companies and investors are aware of the non-binding recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures. 

The UK and Bank of England have long been at the forefront of green finance discussions internationally, both under the G20 and now in the Network for Greening the Financial System through which around 20 major central banks and national regulators are working to contribute to the development of environment and climate risk management in the financial sector, and to mobilize mainstream finance to support the transition toward a sustainable economy. The Network’s interim report was presented in Washington DC last week and included a commitment to “identify some specific areas for Central Banks and Supervisors to “lead by example” and integrate climate-related criteria in a growing number of their operations, including the management of own funds, pension funds and official reserves”. 

The pace of this change is dizzying, the scale of the potential transformation of the financial system is dazzling. We should get excited about that. But we should also keep two crucial points in mind. 

Firstly, we should note that this is happening because of the serious and deepening risks that climate change presents to society and to the global economy as set out clearly in the IPCC’s Special Report on Global Warming of 1.5 degrees. While the challenges of mounting a global political response to climate change are very visible, regulatory ‘adults in the room’ which operate with different mandates and timescales are taking action. Everything is not ok. 

Secondly, we must remember that the central banks and financial regulators are working to manage risk to the economy and preserve financial stability. In the long term this is entirely aligned with managing risk to people and the planet; the social and environmental impacts of climate change will surely have grave economic consequences. In the shorter term these institutions are not all that we need to build a prosperous green economy that works for all, including the most vulnerable in society and the environment: political leaders still bear this responsibility and right now they are not taking the bold steps required. That our national political and governance systems incorporate multiple routes to action is very good news. But that our leaders are not responding to climate change with the urgency and ambition we need is an urgent challenge to us all.