The Bank of England (BoE) has recently urged other banks and insurers to quantify climate risks, according to the media. The statement highlighted that the banks and insurers underestimate the potential impact of climate change on their businesses. They should quantify risks from targeting net-zero carbon emissions by 2050.
The banks and insurers hold assets, including stocks and bonds, for organisations that face physical risks like fires and floods due to climate change. These companies are also exposed to costs of transition to a low-carbon economy.
Sarah Breeden, executive director for UK Deposit Takers Supervision, addressed the media and said it is vital that financial firms recognise that the race to net-zero has already started. She further added, “In support of their ambitions, and consistent with our expectations, they need to run climate scenarios as part of business as usual risk management and embed climate risk management within day-to-day decision-making.”
The green swans or sudden market shifts due to climate change were foreseeable until the management of risks improves multifold. Climate activists have staged protests against HSBC and Barclays that urged them to stop financing investments in fossil fuels. Breeden expresses that an immediate divestment is a part of an economy-wide solution. Scenario analysis is said to help the banks to spot the companies that are among greener over time and those that are not.
The Network for Greening the Financial System (NGFS) is a grouping of central banks that has compiled scenarios for banking firms to use and compare results. Breeden added that the price of carbon should be as fundamental to investment decisions as interest rates.