Only one in 10 banks prepared for climate change risks, Bank of England warns

Only one in 10 banks are adequately prepared for the financial risks linked to climate change, the Bank of England has warned, as it looks to ramp up oversight of lenders’ plans.

A report by the UK’s central bank showed that just 10% of lenders surveyed were developing “a more strategic response” to climate change, meaning boardroom executives were involved in forming a long-term view on the firm’s financial interests.

“Many banks have some way to go to identify and measure the financial risks from climate change comprehensively,” Bank of England Governor Mark Carney said.

“This requires strategic board oversight and more dynamic scenario analysis so actions today can be considered in light of future impacts.”

The Bank’s survey found that around 30% of banks having included climate change in their so-called Corporate Social Responsibility (CSR) models, but efforts were mainly aimed at safeguarding their reputations.

Around 60% were considered “responsive” to climate change, approaching it as a financial risk but in a relatively narrow, short term perspective.

The report said that most lenders have started considering the physical risks to their business models, ranging from the exposure of its mortgage books to flood risks, “or the impact of extreme weather events on sovereign risk”.

But the most advanced strategies, accounting for just 10% of those banks surveyed, “enhance their governance and risk management accordingly to minimise financial risks and support an orderly transition”.

The Bank of England’s regulatory arm, the Prudential Regulation Authority (PRA), will now consult banks on plans to ramp up supervision of lenders’ climate change preparations.

“Building on the PRA’s earlier work, expectations will be set for both banks and insurers,” the report explained.

“They will centre on firms’ governance, strategy and risk management in responding to the financial risks from climate change, including the extent to which boards are strategically considering the distinctive elements of the financial risks,” the report explained.

It said the PRA wants firms to consider the risks identified in its report and “reflect on their current approach.”

Mr Carney said: “Climate change is a tragedy of the horizon which will impose major costs on future generations that the current one has no direct incentive to fix.”

“It is foreseeable financial risks will be realised in some form, the challenge is minimising their impact while firms and society maximise the opportunities.”

While “too rapid a move towards a low-carbon economy” could damage financial stability,” time is running out for banks to prepare, he warned.

“Once climate change becomes a clear and present danger to financial stability it may already be too late to stabilise the atmosphere.”