Britain’s banks and insurers must come up with credible plans for protecting themselves against risks from climate change and may need to hold more capital, the Bank of England said on Monday.
“Financial risks from climate change will be minimized if there is an orderly market transition to a low-carbon world, but the window for an orderly transition is finite and closing,” the central bank said in a policy proposal document.
Governor Mark Carney, who has put climate change issues on the BoE’s regulatory radar, said last month that lenders had failed to grasp the scale of the challenge.
The BoE’s Prudential Regulation Authority said it expects firms to understand how climate risks will affect their business model.”
Insurers are facing heavier payouts for increased flooding caused by climate change and tougher energy efficiency standards for homes and commercial property could affect repayments on mortgages and thereby hit banks, it said.
If the risks are material, the PRA said firms should show how they will mitigate them “and to have a credible plan or policies in place for managing exposures.”
In Monday’s statement setting out its guidance for the consultation, the BoE explained how it expected banks, insurers and building societies to “identify, measure, monitor, manage and report on their exposure” to climate change risks.
It called on firms to help it work out what good measurement and public disclosure of risks would look like.
Some banks have agreed to disclose information regarding climate change already, something which has the potential to become mandatory in the future.
Separately, the Financial Conduct Authority, which regulates asset managers and trading platforms in Britain, published a discussion paper on managing climate change risks.
It asks if investment managers should be required to take risks from climate change into account, and whether there should be a new requirement for firms to report publicly on how they manage climate risks.
The FCA wants to ensure competition and growth in green investments that provide environmental benefits, and will look at how to improve investor information on climate risks faced by a company listing on the stock market.
“We are seeing increasing interest from issuers and investors in the green and sustainable finance space and as a result, greater transparency on sustainable capital flows, but today’s publication shows that the regulators want to see much more,” said Amrita Ahluwalia, a lawyer at Linklaters.
The BoE expects to issue further guidance on best practice 12-18 months after the supervisory statement has been finalized.