Climate change

Latest updates

25 January 2021: On Tuesday 29 December 2020 we published a comment letter responding to the consultation paper on sustainability reporting issued by the International Financial Reporting Standards (IFRS) Foundation. This comment letter follows the joint statement issued by the Government-Regulator TCFD taskforce, and reiterates our support for the IFRS Foundation’s proposal to establish a new sustainability reporting standard setting body.

16 December 2020: We published an update on the methodology for the Climate BES Opens in a new window. The update sets out several key areas where the Bank has revisited the proposed approach described in the 2019 Discussion Paper, including in response to feedback on that paper. It also includes an indicative list of variables to be provided as part of the CBES scenarios, on which we will be seeking feedback from firms.

16 November 2020: We published our ‘Response to the general insurance industry – A framework for assessing financial impacts of physical climate change’, following feedback received for our ‘A framework for assessing financial impacts of physical climate change’ report, which was published on 22 May 2019.

13 November 2020: We announced Climate BES timelines, participants and a planned programme of engagement with participants ahead of launch. The Climate BES will be launched in June 2021.

10 November 2020: The Bank of England, Financial Conduct Authority, Financial Reporting Council, The Pensions Regulator, Department of Work and Pensions, Department for Business, Energy and Industrial Strategy and HM Treasury, published a joint statement in support of the International Financial Reporting Standards (IFRS) Foundation’s recent consultation paper Opens in a new window Opens in a new window proposing that it establishes a new standard setting body for sustainability disclosures, focussing on climate-related disclosures first.

9 November 2020: The Government–Regulator TCFD Taskforce, set up to examine the most effective way to approach climate related financial disclosures, including exploring the appropriateness of mandatory reporting, published an interim report and roadmap Opens in a new window Opens in a new window setting out an indicative path towards mandatory climate-related disclosures across the UK economy. Chaired by HM Treasury, the taskforce members are the Bank of England, Financial Conduct Authority, Financial Reporting Council, The Pensions Regulator, Department of Work and Pensions, and Department for Business, Energy and Industrial Strategy.

18 September 2020: Jointly with the Bank of England, Financial Conduct Authority, Competition & Markets Authority, Payment Systems Regulator, Information Commissioner’s Office, Pensions Regulator, and HM Treasury (as observer member), we published an updated version of the Regulatory Initiatives Forum’s grid Opens in a new window Opens in a new window – a consolidated plan of initiatives that the authorities consider will, or may, have significant operational impact on firms across the next 24 months.

1 July 2020: We published a letter from Sam Woods to all PRA-regulated firms on ‘Managing climate-related financial risk – thematic feedback from the PRA’s review of firms’ SS3/19 plans and clarification of expectations’. We also published a speech by Sarah Breeden ‘Leading the Change: Climate Action in the Financial Sector’.

29 June 2020: The Climate Financial Risk Forum has published a guide Opens in a new window Opens in a new window written by the industry for the industry to help financial services firms approach and address climate-related financial risks.

24 June 2020: The Network for Greening the Financial System (NGFS) published a set of scenarios for climate-risk analysis by central banks and supervisors. This work was led by Workstream 2 of the NGFS, which is chaired by the Bank, and will form the basis for the scenarios in the 2021 Climate BES.

18 June 2020: We published the Bank’s first climate-related financial disclosure, setting out the Bank’s approach to managing the risks from climate change across its entire operations, including the steps taken to improve its understanding of these risks in future years.

7 May 2020: Jointly with the Bank of England, Financial Conduct Authority, Competition & Markets Authority, Payment Systems Regulator and HM Treasury (as observer member), we published the Regulatory Initiatives Forum’s first grid Opens in a new window Opens in a new window – a consolidated plan of initiatives that the authorities consider will, or may, have significant operational impact on firms across the next 12 months.
7 May 2020: We published a statement announcing further details of our plans to support firms we regulate and enable them to focus resources on the highest priority work in light of Covid-19.
18 December 2019: We published a discussion paper setting out the proposal for the 2021 Biennial Exploratory Scenario on climate-related risks. The objective is to test the resilience of the largest banks, insurers and the financial system to different possible climate pathways and provide a comprehensive assessment of the UK financial system’s exposure to climate-related risks. The response period closes on 18 March 2020.

12 August 2019 and 18 December 2019: We published the minutes for the second and third meetings of the PRA and FCA joint Climate Financial Risk Forum.

11 July 2019: We published plans to test the UK financial system’s resilience to the risks from climate change as part of the 2021 Biennial Exploratory Scenario. This was set out in the July Financial Stability Report

2 July 2019: The PRA, the Financial Conduct Authority, Financial Reporting Council, and The Pensions Regulator, published a joint statement on climate change, in support of the launch of the Government’s Green Finance Strategy. The joint statement includes a message from Sam Woods, Deputy Governor for Prudential Regulation, and Chief Executive of the PRA.

20 June 2019: Huw van Steenis published his review of the future of the UK’s financial system and what it might mean for the Bank at the request of the Governor. The report included a section on the need for a smooth transition to a low-carbon economy. The Bank’s response to the report was also published.

18 June 2019: The PRA published details of its Insurance Stress Test for 2019, which includes an exploratory exercise in relation to climate change. The set of climate scenarios explores the impacts to both firms' liabilities and investments stemming from physical and transition risks.

22 May 2019: We published a report from a cross-industry working group ‘A framework for assessing financial impacts of physical climate change. A practitioner’s aide for the general insurance sector’.

17 April 2019: We published a news release 'Bank of England to disclose assessment of how it manages climate-related financial risk in the 2019/20 annual report, and an open letter on climate-related financial risks' from Mark Carney, Governor of the Bank of England, Francois Villeroy de Galhau, Governor of the Banque de France, and Frank Elderson, Chair of the Network for Greening the Financial System (NGFS). This follows publication of the NGFS’s first comprehensive report ‘A call for action – climate change as a source of financial risk’, also published today.

15 April 2019: We issued the following communications which will be of interest to banks and insurers on climate change:
- Policy Statement 11/19 and Supervisory Statement 3/19 on ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’. This follows the reports on the impact of climate on the banking and insurance sectors; and
- ‘Avoiding the Storm: Climate Change and the Financial System’ a speech by Sarah Breeden, Executive Director, International Banks Supervision.
12 March 2019: We published a news release on the first meeting of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) joint Climate Financial Risk Forum. For more information also see ‘Insurance and banking supervision and climate change’ below.

Our response to climate change

The Bank’s response to climate change is motivated by its statutory objectives. The first involves promoting safety and soundness by enhancing the PRA’s approach to supervising the financial risks from climate change. The second involves enhancing the resilience of the UK financial system by supporting an orderly market transition to a low-carbon economy. We first set out our strategy for responding to these risks in an article published in the June 2017 edition of our Quarterly Bulletin.

We set up the Future of Finance project to look at how financial services might evolve over the next decade, and what this could mean for everyone who uses, provides or regulates them. Huw van Steenis led the review and published his findings and recommendations in June 2019. This included the recommendation for the Bank to promote the smooth transition to a low carbon economy. The Bank set out its response to that review and committed to take action to support an orderly transition.

The Future of Finance

The Governor of the Bank of England, Mark Carney, the executive sponsor of the Bank’s work in this area, Sarah Breeden, and other Bank seniors have discussed the financial risks from climate change and the Bank’s response in various speeches.

Speeches on climate change

Bank of England climate-related financial disclosure

The Bank published its own climate-related financial disclosure for the first time in June 2020. This sets out the Bank’s approach to managing the risks from climate change across its entire operations, and explains what it’s doing to improve its understanding of these risks. This forms part of the Bank’s work under its strategic goal on climate change. It reflects the importance that the Bank attaches to climate-related risk disclosure, and the high standards that it expects both of itself, and the firms it regulates.

Prudential supervision and climate change

The Bank’s initial focus was on the impact of climate change on the insurance sector, and the PRA published a report in September 2015.

The impact of climate change on the UK insurance sector Opens in a new window

Subsequently, the Bank completed a review of the impact on the UK banking sector, which was published in September 2018. The report highlighted that a transition in thinking is taking place across the sector from viewing climate change as a potential reputational risk to a core financial and strategic risk.

Transition in thinking: The impact of climate change on the UK banking sector

Building on the insurance and banking reviews, in April 2019, the PRA published Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’. This SS was published alongside Policy Statement 11/19, addressing the responses to CP23/18.

Subject to any transitional relief, PRA Supervisory Statements and Statements of Policy applicable before 11pm Thursday 31 December 2020 should be read in conjunction with Supervisory Statement (SS) 1/19 which sets out how the PRA expects firms to interpret EU-based references in non-binding PRA regulatory and supervisory materials after the UK’s withdrawal from the EU and the end of the transition period.

Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’

Working with a group of representatives from the general insurance sector, in May, the PRA published the report ‘A framework for assessing financial impacts of physical climate change. A practitioner’s aide for the general insurance sector’. The paper outlines a framework for practitioners to use to assess climate-related financial risks, using tools that are already available within the general insurance sector. The framework is intended as a possible starting point for firms to assess the impacts in the context of their business decisions and disclosure requirements.

In November 2020, the Bank of England, jointly with the other members of the Government–Regulator TCFD Taskforce, set up to examine the most effective way to approach climate-related financial disclosures, published an interim report and roadmap Opens in a new window setting out an indicative path towards mandatory climate-related disclosures across the UK economy, aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The strategy presented is ambitious but proportionate, aiming to ensure that the right information on climate-related risks and opportunities is available across the investment chain – from companies in the real economy, to financial services firms, to end-investors. At this stage, the Bank of England and, in particular, the PRA has not introduced new requirements for PRA-regulated banks and insurers. However, a number of the new measures proposed by government and other regulators in the interim report and roadmap will impose requirements on PRA-regulated firms.

A framework for assessing financial impacts of physical climate change. A practitioner’s aide for the general insurance sector

Climate Financial Risk Forum (CFRF)

The PRA, together with the FCA, has established a Climate Financial Risk Forum (CFRF) to build intellectual capacity and share best practice. The CFRF brings together senior representatives from across the financial sector, including banks, insurers, and asset managers. The forum has set up four working groups to produce practical guidance on four specific topic areas: risk management, scenario analysis, disclosure, and innovation. The final outputs will be shared with industry more widely.

Full background and information on the CFRF, its guide on how to approach and address climate-related financial risks, and summaries of meetings are available on the Climate Financial Risk Forum guide summary.

Stress testing and climate change

The Bank is utilising its stress testing framework to assess the impact of climate-related risks on the UK financial system.

In June 2019, the PRA published details of its Insurance Stress Test for 2019, which included an exploratory exercise in relation to climate change. The set of climate scenarios explored the impacts to both firms' liabilities and investments stemming from physical and transition risks.

Building on the Insurance Stress Test, the Bank announced plans to test the UK financial system’s resilience to the financial risks from climate change as part of the 2021 Biennial Exploratory Scenario (the Climate BES). This plan was set out in the July Financial Stability Report, and in December 2019, the Bank published a discussion paper setting out a more detailed proposal. In November 2020, the Bank announced that the Climate BES would be launched in June 2021.

The objective of the Climate BES is to test the resilience of the largest banks, insurers and the financial system to different possible climate pathways and provide a comprehensive assessment of the UK financial system’s exposure to climate-related risks. The Climate BES will ask firms to consider three scenarios, which will be based on the scenarios published by the Network for Greening the Financial System (NGFS).

Latest updates on the Climate BES

International climate-related initiatives

The Bank of England is a founding member of the Central Banks and Supervisors Network for Greening the Financial System. The Network was formed in December 2017, at the One Planet Summit in Paris. It was co-founded by eight central banks and supervisors, and, as of July 2020, has 66 members and 13 observers.

The Bank chairs the NGFS workstream looking at sizing the risks from climate change to the financial system and macroeconomy. It actively contributes to the other workstreams on supervision of climate-related risks and scaling up green finance. In January 2019, the Bank hosted an NGFS conference on ‘the macroeconomic and financial stability impacts from climate change.’

In June 2020, under the Chairmanship of the Bank, the NGFS published a first set of climate scenarios alongside a first-of-its-kind Guide to climate scenario analysis for central banks and supervisors. The NGFS scenarios have been developed to provide central banks and supervisors, as well as financial firms and companies, a common starting point for analysing climate risks under different future pathways. These scenarios will also serve as a basis for the 2021 Biennial Exploratory Scenario (BES) on climate risks. The Guide provides practical advice on using scenario analysis to assess climate risks to the economy and financial system.

Other notable publications by the NGFS include its first comprehensive report, ‘A call for action – climate change as a source of financial risk’ from April 2019. The report sets out six recommendations for central banks, supervisors, policymakers and financial institutions to enhance their role in the greening of the financial system and the managing of climate and environment-related risks. Alongside the report, Mark Carney, former Governor of the Bank of England, Francois Villeroy de Galhau, Governor of the Banque de France, and Frank Elderson, Chair of the Network for Greening the Financial System (NGFS) wrote an open letter on climate-related financial risks. More recently, they and Andrew Bailey, Governor of the Bank of England, wrote an open letter arguing that the world must seize the opportunity created by the coronavirus outbreak to meet the climate challenge.

The Bank also co-founded the Sustainable Insurance Forum (SIF). SIF is a global network of insurance supervisors and regulators, who are working together on sustainability challenges facing the insurance sector, including climate change.

To allow markets to better assess, price and manage climate-related financial risks, the Financial Stability Board (FSB), at the request of G20 leaders, established the industry-led Task Force on Climate-related Financial Disclosures (TCFD). The Bank supports the TCFD, and has, for example, co-hosted a conference on scenario analysis in November 2017.

The TCFD’s framework is increasingly becoming the global standard for climate disclosures. The Bank used this framework for its first climate-related financial disclosure as part of its annual reporting for the financial year 2019/20, setting out the Bank’s approach to managing the risk.

On 30 September 2020 the International Financial Reporting Standards (IFRS) Foundation published a consultation paper proposing that it establishes a new standard setting body for sustainability disclosures, focusing first on climate-related financial disclosure. This would build on the principles set out in existing frameworks such as TCFD. We welcome the consideration given to this topic by the IFRS Foundation and, together with the other members of the Government–Regulator TCFD Taskforce, have published a joint statement in support of the IFRS Foundation’s proposals.

Research on climate change

The Bank has engaged in several research activities on climate change.

In May 2016, we published a Staff Working Paper on the impact of climate change on central banks. It examines the channels via which climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary and financial stability objectives.

In July 2016, we held a joint workshop with the Met Office on climate risk and financial stability.

In November 2016, we held a joint conference, 'Central banking, climate change and environmental sustainability’ with the Council on Economic Policies.

In January 2018, we published a Staff Working Paper on climate change and the macro-economy. The review focused on the key theoretical and empirical modelling issues in the analysis of the macroeconomic risks deriving from climate change.

In May 2018, we published a joint article in Nature Climate Change on the climate change challenges for central banks and financial regulators. The paper presents the key controversies in the central banks and regulators’ response to climate change, and discusses potential areas for future research and policy.

In October 2018, we published a Bank Underground article on the relationship between mortgage arrears and property energy ratings. Analysing borrower-level data, the research suggests that mortgages on efficient properties are less risky.

Reducing our environmental impact

We are also committed to running our own operations responsibly and sustainably. Our Greener Bank programme is aimed at reducing the environmental impact of our day-to-day operations.

Corporate responsibility at the Bank

// News // Statement