Embedding understanding and governing climate-related risks at the Bank of England

Research from the University of Oxford on climate transition risks and stranded assets has substantially influenced the Bank of England’s acknowledgement and subsequent governance of these risks since 2014. This has catalysed a global movement on climate change across financial institutions and financial supervision agencies.

 

Issue

Aligning finance and the financial system with environmental sustainability is a necessary condition for meeting the Paris Agreement and the Sustainable Development Goals. Central bank action is a pre-requisite for this to be achieved. In 2012 there was no work on, or expertise in climate change at the Bank of England, or in any other major central bank.

 

Approach

A research programme on transition risks and stranded assets has been developed to analyse the magnitude of both individual transition risks and sets of transition risks for specific sectors.

Research has also focused on the identification of actions that institutional investors and central banks can take to identify and mitigate transition risks and pre-empt asset stranding.

 

Impact

Members of the team served as a key advisor to the Bank of England on its seminal report, 'Impact of Climate Change on the UK Insurance Sector', published on 29 September 2015. The report also set out principles for how the bank would approach climate change in the future and confirmed that it considered managing climate risks to be part of its statutory mandate.

The Bank published a consultation paper in October 2018 to propose specific changes to supervision for supervised banks and insurers. Proposals were adopted in April 2019 via the publication of formal regulatory notices, requiring boards and senior management of the 1,500 firms supervised by the Bank of England to have the data, scenario analysis, and management plans in place to measure, manage and disclose climate-related risks.

The research has increased understanding of climate-related transition risks in UK policy, through written evidence and witness testimony to the Environment Audit Committee’s ‘Green Finance’ inquiry in 2017-2018. The UK Government followed the Committee’s recommendations, announcing in July 2019 that large asset owners and listed companies are expected to report climate change risks from 2022.  

The Bank of England’s work on climate risk has also catalysed a broader international movement across central banks internationally. The Bank of England co-founded the Central Bank and Supervisors Network for Greening the Financial System (NGFS) to enhance the work of central banks on climate change, and it now has almost 80 members and observers, including the International Monetary Fund.

 

More information

• Read the full impact case study in the REF21 database

Institution: University of Oxford 

Researcher: Dr Ben Caldecott