Bank of England: Insurers and banks must manage the financial risks of climate change

Callum Keown
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Banks have been urged to better prepare for the financial risks of climate change (Source: Getty)

The Bank of England has urged banks and insurers to improve its mitigation of the financial risks of climate change.

Financial institutions will also be asked to disclose how it will manage those risks as well as explore potential scenarios for the future in new measures put forward today.

The BoE’s Prudential Regulation Authority (PRA) has launched a consultation on called for “board-level engagement and responsibility” and said there were currently significant differences in the “maturity” of firms’ responses to the risk of climate change.

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It comes after global insured losses from natural disaster events in 2017 reached the highest recorded levels and annual losses rose from an average of $10bn in the 1980s to $55bn over the last decade.

Last month the strongest storm of the year – Typhoon Mangkhut – devastated Hong Kong’s financial district and the US east coast was also hit by floods and strong winds.

The PRA warned of two types of risk; physical – relating to natural disasters, and transitional – changes to a low-carbon world that might affect sectors.

The BoE’s separate review on the impact of climate change on the banking sector highlighted a number of transitional changes already occurring, such as the tightening of energy efficiency standards and its impact on the buy-to-let market.

It also cited the energy transition and its impact on the coal industry and the low-carbon push on the automotive industry.

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The proposals would be voluntary but the PRA could take action if the guidance isn’t followed and risks are not adequately managed.

The report also suggested that companies had a responsibility to take action to reduce the threat of climate change in the future.

It said: “A ‘too little, too late’ scenario, where significant action is taken, but too late to achieve climate goals, could result in the most severe financial risks crystallising in the banking and insurance sectors.

“Financial risks from climate change will be minimised if there is an orderly transition to a low-carbon world, but the window for an orderly transition is finite and closing.”

Further guidance on best practices for producing risk management is expected to be published 12-18 months after the supervisory statement is finalised.

The consultation will run until 15 January 2019.