In 2018, the Bank of England (the “BoE”) set up a project called “Future of Finance” aimed at anticipating the upcoming changes in financial services for the next decade, and the impact of these changes for market participants, customers and regulators.
This research was led by Huw van Steenis, Senior Adviser to the Governor, and his recommendations to the BoE were published on 20 June 2019. The decarbonation of our economy is identified as a predominant factor among the main forces that will shape the economy in the coming decade. .
The BoE’s report “New Economy, New Finance, New Bank” responds to Mr van Steenis’ recommendations, identifying support of an orderly transition to a carbon-neutral economy as one of its top-five priorities. The BoE is committed to lead by example and help mainstream a culture of climate risk management throughout the economy.
Climate change represents a threat to financial stability and the safety and soundness of financial firms particularly through two channels: physical risks and transition risks. Since April 2019, UK banks and insurers are required by the Prudential Regulation Authority (“PRA”) to take a strategic, Board-led approach to tackle this new financial risk factor, and to incorporate it in their governance, risk management, scenario analysis and disclosure arrangements. The first key milestone for banks and insurance companies will be the submission of an action plan to the PRA by 15 October 2019. Eventually financial firms’ capital requirements will reflect their exposure levels to climate financial risks.
Mr van Steenis reports some significant barriers to the emergence of an appropriate response to climate change-related risks as well as the occurrence of a smooth transition. These include:
Despite these barriers, the BoE observes that progress has been made in a number of areas in recent years:
The BoE has committed to a number of actions aiming to promote the adoption of climate change disclosures and the embedment of climate risk management. The two actions highlighted below will expectedly have a significant impact in shaping the financial industry approach toward climate change risk management:
The BoE is calling for the financial services sector to act now and ensure it is resilient to the risks arising from climate change. “The window for an orderly transition that minimises those risks is finite and closing.”  It is about time to take actions for the economy to adapt.