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Climate change: why it matters to the Bank of England

Chapters

    The environment, the global economy and climate change

    The economy and the environment are closely entwined. Many economic activities have an environmental impact. Burning coal, oil and gas can contribute to climate change, while waste from factories can pollute our land, rivers and sea.

    The environment can affect the global economy too. For example, the floods in Thailand in 2011 resulted in over $45 billion of economic losses. More positively, at the other side of the globe, the mangrove forests in Mexico provide storm protection and give support for fisheries and eco-tourism. These benefits have been estimated at $70 billion in financial terms.

    Climate change is therefore a central issue to consider and is widely seen as one of the biggest threats to a sustainable future. The steady rise in human activity – and the subsequent greenhouse gas emissions – witnessed since the industrial revolution has already had a considerable and measurable impact on our planet.

    Scientists estimate that global temperatures have risen by around 1°C since 1850.  This figure could exceed 4°C by the end of this century if no action to limit emissions is taken.

    A rise of 4°C could have a devastating effect on the environment. Because of this, global deals like the Paris Agreement aim to reduce the risks of severe and irreversible climate changes and help the move to a greener economy.

    Why does the Bank of England think climate change is important?

    Severe climatic changes could impact the economy in various ways, whether it’s affecting total economic activity, the productivity of the workforce or the smooth functioning of financial markets.

    An important angle for the Bank of England is the risks that climate change poses for the stability of the financial system. Physical risks can arise from events like storms, floods and droughts. Meanwhile, transition risks can arise from changes in policy (such as the Paris Agreement) and technology (such as the growth of renewable energy).

    How are these financial risks relevant to the Bank’s work?

    To start with, we are responsible for making sure that individual banks, insurance companies and other financial institutions are safe and sound – and that they can remain open for business.

    As well as regulating individual institutions, we monitor risks to the UK financial system as a whole – and act to reduce those risks where possible.

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    What is the Bank of England’s response to climate change?

    We recently completed a review of the impact of climate change on the UK insurance sector (further details below). A similar review is underway for the banking sector.  The aim is to make sure that individual banks and insurers consider the financial risks that can arise from climate change, as they would for other kinds of risks (such as those stemming from changes in interest rates or the introduction of driverless cars).

    But global challenges require global responses. We are working with other central banks, financial regulators and other relevant partners to help reduce the overall risks to the financial system as a whole. This includes supporting an international initiative that encourages firms around the world to disclose more information on the financial risks from climate change.

    Of course, we also need to actively review our own practices and how they affect the environment. We have a small team focused on finding ways to cut our energy usage and reduce the amount of waste we produce. For instance, as one small step, most hot drinks purchased in our staff cafes are now served in reusable cups to help reduce the Bank’s own environmental footprint.

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    Find out more:

    • The Met Office has useful information on climate change. Meanwhile, Mission 2020 outlines the importance of early action to reduce the risks from climate change and monitors progress.
    • The New Climate Economy project seeks to help governments, businesses and society make better informed decisions on matters relating to the economy and climate change.
    • For more information on the Bank of England’s response to climate change, see this article, the pages on our main website and this speech by the Governor.

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