Sarah Breeden, Executive Director, International Banking Supervision, Bank of England
Please give us some background information on yourself and how your organisation plays a leading role in the climate risk agenda?
I am the Bank of England’s Executive Director for International Banks Supervision, as well as the sponsor for its work on climate change.
The Bank has been clear for some years now that climate change and the transition to a carbon-neutral economy creates financial risks that matter for the Bank’s objectives to ensure the safety and soundness of banks and insurers, as well as the stability of the UK financial system.
In April we became the first regulator in the world to set out supervisory expectations for the firms we regulate to enhance their approach to managing these risks. We are working with the FCA and the financial services industry through the Climate Financial Risk Forum to share best practice and build expertise in this important and immature field. And we have recently announced that we will stress test the UK financial system for its resilience against different climate pathways.
Internationally the Bank has led climate change initiatives by supporting the Task Force on Climate-related Financial Disclosure (TCFD). In our next annual report, we will become the first central bank to adopt those recommendations across our entire operations. We are a co-founder of the international Central Banks and Supervisors Network for Greening the Financial System (NGFS) – a coalition of the willing whose aim is to enhance the role of the financial system in supporting the transition to a carbon-neutral sustainable economy. In just 18 months, the NGFS has grown from 8 to 40 members.
It is not for the Bank of England, as a financial policymaker, to solve the problem of climate change. But we do expect financial firms to manage the financial risks that climate change brings. And in so doing, the financial system can help smooth the transition to a carbon-neutral economy.
How do you see climate change affecting your organisation/the organisations you work with?
Climate change creates physical and transition risks that matter for the safety and soundness of financial firms and the stability of the financial system as a whole.
Physical risks arise from climate and weather-related events, such as droughts, floods, storms and rises in sea-level. These events cause damage to property, land and infrastructure, bringing financial losses and impairments in asset values and borrower creditworthiness. Transition risk is the financial risk which results from the process of adjustment towards a carbon-neutral economy. Changes in climate policy, technology or market sentiment could prompt a reassessment of the value of a large range of assets, creating ‘stranded assets’ that turn out to be worth less than expected, probably zero in the case of unburnable carbon. A climate Minsky moment – where asset prices adjust quickly, with negative feedback loops to growth – seems possible.
Our view is that these risks are far-reaching in breadth and scope, foreseeable and their size will reflect the actions we take today. Our supervisory expectations are designed to ensure firms take a strategic approach, led by the Board, and with clear accountability. The approach should be holistic, forward-looking and embedded in business-as-usual risk management but grounded in the long-term financial interests of the firm.
How can diverse stakeholders, governments, the private sector, academics and nonprofits more effectively collaborate to reach climate-related goals?
Climate change is an unprecedented challenge that affects everyone. We need a better shared understanding of what the transition to a carbon-neutral economy will entail and what that means for the economy and financial system. We need more data, greater disclosure, better analytical toolkits, advanced scenario analysis and new risk management techniques to help assess the future financial risks in light of today’s actions. All these need wide and collaborative engagement from a range of stakeholders.
Many initiatives have been formed to help us collaborate better across regulators (e.g. NGFS) and across the financial sector (e.g. the Climate Financial Risk Forum). We have engaged with stakeholders outside of the financial sector such as academics and nonprofits to help us form our thinking. One good opportunity to engage with our work would be participating in our consultation processes. In the autumn we will be putting out a discussion paper on the design of a climate change stress test through our Biennial Exploratory Scenario, to help us leverage existing expertise and build capacity in the industry, and we encourage all stakeholders to get involved.
What’s the one thought you would like attendees to take away with them from the Climate Risk Summit?
A smooth and successful transition to a carbon-neutral future will require the engagement of everyone – domestically and internationally, the private and the public sector, the real economy and the financial sector and the time to act is now. Complexity and uncertainty cannot be an excuse for inertia. By working together and being forward-looking the financial system will be more resilient to the financial risks from climate change and better placed to support the orderly transition we all need.