Climate change

Climate change, the economy and financial system

Climate change affects our planet, our economy and our financial system. As such, climate change is relevant to the Bank of England’s central mission to promote the good of the people of the United Kingdom by maintaining monetary and financial stability.

The rise in human activity – and the subsequent carbon and other greenhouse gas (GHG) emissions – experienced since the industrial revolution has already had a considerable and measurable impact on our planet’s climate. Scientists estimate that global temperatures have risen by around 1°C since 1850, and could exceed 4°C by the end of this century if no action to limit emissions is taken.

For this reason, over 190 countries signed up to the Paris Agreement in 2015, which set out a global framework for combating climate change. The primary goals of this agreement are to keep the average global temperature rise this century well below 2°C above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5°C. Over recent years, more than 130 countries have announced their ambition to reduce emissions to net zero. Many, including the UK, have set legally binding targets to reduce emissions.

Achieving these targets will require large scale reductions in GHG emissions globally – and estimates by climate science bodies such as the Intergovernmental Panel on Climate Change (IPCC) suggest that countries must have net-zero emissions by 2050 to achieve this. The transition to net-zero emissions would affect all countries and sectors, and would involve unprecedented structural changes to our economies.

The physical effects of climate change, such as rising sea levels and more frequent severe weather events, as well as the transition to a net-zero economy, through changes in government climate policy, technology and consumer preferences, create financial risks and economic consequences. These risks and consequences can affect the safety and soundness of the firms we regulate, the stability of the wider financial system, and the macroeconomic outlook.

Find out more about climate change and why it matters for us.

Our response to climate change

The risks from the physical effects of climate change and the transition to a net-zero economy are relevant to our mission to maintain monetary and financial stability. In particular, these risks pose a threat to the stability of the wider financial system, and the safety and soundness of firms we regulate. As such, climate change is a strategic priority for us.

Our objective is to: ‘play a leading role, through our policies and operations, in ensuring the financial system, the macro-economy, and the Bank of England are resilient to the risks from climate change and supportive of the transition to a net-zero economy.’

We aim to build this resilience and support the transition by ensuring that climate-related financial risks are pro-actively managed and pre-emptively mitigated through our policy functions (eg our supervision of banks and insurers) and the management of our own operations (eg the carbon footprint of our buildings and corporate bond holdings).

Our climate strategy continues to evolve, reflecting the progress we have made to date, updates to our policy committees’ remits and recommendations, and the opportunities presented in 2021 by the UK’s presidency of the G7 and hosting the 26th UN Climate Change Conference of the Parties (COP26).

Find out more about our current climate strategy. It is built around five key goals.

Climate change touches all areas of our work, and as such is embedded across our existing governance and risk functions. Sarah Breeden, Executive Director for UK Deposit Takers Supervision (UKDT), is currently our Executive Sponsor for climate change. Alongside Sarah, Joanna Place, Chief Operating Officer, is our Executive Committee Sponsor for climate change across our internal operations.

Read speeches by members of our senior team to find out more about our response to climate change.

Latest updates

9 September 2021: We announced that registration opened for a joint research conference with Banca d'Italia on the macro-financial impacts of climate change and the net-zero transition.

17 June 2021: We published our second annual climate-related financial disclosure report, setting out our approach to managing the risks from climate change across our operations.

8 June 2021: We published the Climate Biennial Exploratory Scenario (CBES) to explore the financial risks posed by climate change for the largest UK banks and insurers.

7 June 2021: The NGFS published the second vintage of its climate scenarios and launched a dedicated website.

1 and 3 June 2021: Governor Andrew Bailey gave a series of speeches on the role of central banks in responding to the risks from climate change and the work we are doing in this space. 

UK financial regulation and supervision

Prudential supervision

The risks from the physical effects of climate change, as well as the transition to net zero, pose a threat to the stability of the wider financial system, and the safety and soundness of firms we regulate.

In April 2019, building on both our 2015 insurance report and 2018 banking report, we became the first central bank and supervisor to set supervisory expectations (Supervisory Statement 3/19) for banks and insurers on the management of climate-related financial risks, covering governance, risk management, scenario analysis and disclosure. This set out our expectations that firms take a strategic approach to managing climate risk, identifying current risks and those that can plausibly arise in the future, and appropriate actions to mitigate those risks. SS3/19 was published alongside Policy Statement 11/19, addressing the responses to Consultation Paper 23/18.

We followed this up with a ‘Dear CEO letter’ to firms in 2020. This letter set out more detailed guidance on how firms should embed their approaches to managing climate-related financial risks by the end of 2021. This letter built on the expectations set out in Supervisory Statement 3/19, and provided observations on good practice and set out next steps for implementation.

Climate Financial Risk Forum

In March 2019, together with the Financial Conduct Authority (FCA), we established the Climate Financial Risk Forum (CFRF) to build capacity and share best practice across industry and financial regulators to advance our sector’s responses to the financial risks from climate change.

It 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 areas: risk management, scenario analysis, disclosure and innovation.

In June 2020, the CFRF published its guide to help the financial industry approach and address climate-related financial risks. The forum continues to build on this guide, by developing new materials that progress the management of climate-related financial risks.

Climate scenario analysis and stress testing

The financial risks posed by climate change are unprecedented, and so building a toolkit to help manage and mitigate them is equally unprecedented. Climate scenario analysis and stress testing is a key part of such a toolkit. It allows for the exploration of impacts and exposures under a range of different potential climate pathways. For these reasons, we are using our stress testing framework to assess the impact of climate-related risks on the UK financial system.

In June 2021, we published the Key Elements document outlining the 2021 Biennial Exploratory Scenario on financial risks from climate change. The 2021 Climate Biennial Exploratory Scenario (CBES) will explore the resilience of the UK financial system to the physical and transition risks associated with three scenarios of early, late and no additional action, which build on a subset of the scenarios published by the Network for Greening the Financial System (NGFS).

This is the first time we are testing both banks and insurers to allow us to capture interactions between them and understand the risk presented by climate change across the financial system. We expect to publish the CBES results in May 2022.

The 2021 CBES built on our 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.

Research on climate change

The potential macroeconomic and financial stability implications of climate change and the transition to a net-zero economy are a key focus within our One Bank Research Agenda.

As part of our work on climate change, we research key topics, participate in conferences and host workshops. To date, this has included:

April 2021: Staff Working Paper on climate policy and transition risk in the housing market.

November 2020: Bank Underground article on the Covid-19 crisis, climate change and green recovery.

March 2020: Staff Working Paper on the relationship between bank lending and severe weather events.

October 2018: Bank Underground article on the potential macroeconomic implications of a transition to a low-carbon economy.

October 2018: Bank Underground article on the relationship between mortgage arrears and property energy ratings.

May 2018: Joint article in Nature Climate Change on the climate change challenges for central banks and financial regulators.

January 2018: Staff Working Paper on climate change and the macro-economy.

November 2016: A joint conference with the Council on Economic Policies on 'Central banking, climate change and environmental sustainability’.

July 2016: A joint workshop with the Met Office on climate risk and financial stability.

May 2016: Staff Working Paper on the impact of climate change on central banks.

International engagement and initiatives

The financial and economic consequences of climate change are not solely domestic concerns. As such, we play in active role in supporting a co-ordinated international approach to climate change. For example, through our work with other central banks and financial supervisors, playing prominent roles in international fora (such as the G7 and G20), and by working with the Government to deliver on its COP26 agenda.

We also engage in the climate-related workstreams of standard setters and international bodies. For example, we are contributors to the climate-related work of the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB).

Central Banks and Supervisors Network for Greening the Financial System (NGFS)

We are a founding member of the Central Banks and Supervisors Network for Greening the Financial System (NGFS) and sit on the steering committee. The NGFS was co-founded by eight central banks and supervisory authorities in December 2017, and its membership has since grown to over 90 members and 14 observers.

We have played a leading role in developing the network’s understanding on climate-related issues, in part, through Sarah Breeden’s chairing of the NGFS macrofinancial workstream (WS2). In June 2020, the NGFS published a first set of climate scenarios alongside a guide to climate scenario analysis for central banks and supervisors. The NGFS climate scenarios have been developed under WS2 to provide central banks and supervisors, as well as financial firms and companies, with a common starting point for analysing climate risks under different future climate pathways. A second vintage of the NGFS scenarios, along with a dedicated website, were published in June 2021.

Through the NGFS, we aim share our own experience, learn from others, and promote consistent and effective responses to climate risks by central banks and supervisors across the world.

Sustainable Insurance Forum

We are also co-founders of 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.

In 2020, the SIF published a climate-related question bank for insurance supervisors and, alongside the International Association of Insurance Supervisors (IAIS), published a landmark draft paper on the supervision of climate risks in the insurance sector. Anna Sweeney, our Executive Director of Insurance Supervision, is the chair of the SIF and Vicky Saporta, our Executive Director of Prudential Policy, is chair of the IAIS.

Supporting enhanced climate disclosure

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 TCFD’s framework is increasingly becoming the global standard for climate disclosures. We used this framework for our own annual climate-related financial disclosure, which was first published as part of our annual reporting for the financial year 2019/20, and sets out our approach to managing climate risks.

We are an official supporter of the TCFD recommendations. In November 2020, we, alongside others in the joint Government-Regulator TCFD Taskforce, set out a roadmap towards mandatory TCFD-aligned climate disclosures across the UK economy by 2025.

Additionally, when the IFRS Foundation consulted on establishing a Sustainability Standards Board in November 2020, in publicly supporting the proposals, we recommended that to promote global consistency, future global sustainability standards should build on the framework and recommendations of the TCFD.

Supporting increased technical co-operation and assistance

We support the work of other central banks and financial regulators on the issue of climate change, in part through our Centre for Central Banking Studies (CCBS).

For decades, we have been providing international central banking technical co-operation and assistance to equip central bankers and financial regulators with the skills and knowledge they need to tackle the challenges they face. In recent years, this has included assistance on climate change.

In partnership with the UK’s Foreign, Commonwealth and Development Office (FCDO), we are planning to host a series of workshops on climate change in 2021. These will be aimed at central bankers and financial regulators who handle climate related issues in their institutions. Find out more on this programme.

We support the Central Banks’ and Supervisors’ Climate Training Alliance (CTA), established by the Bank for International Settlements (BIS), International Association of Insurance Supervisors (IAIS), NGFS and SIF. The Climate Training Alliance aims to support technical cooperation and assistance on climate risks among central banks and financial supervisors.

Our own disclosure and operations

Our climate-related financial disclosure

We hold ourselves to the same high standards that we expect of the firms we regulate. Consequently, we need to ensure that, wherever possible, our own financial operations, such as the financial asset portfolios we hold, and our own physical operations, such as emissions from our buildings and printing banknotes, conform to best practice in the measurement, management and mitigation of climate risks.

In the spirit of transparency, we published our own TCFD-aligned climate-related financial disclosure for the first time in June 2020. This sets out our approach to managing the risks from climate change across our policy functions and operations, including those in financial asset portfolios held for monetary policy purposes, a first for a central bank at the time.

We have committed to run this exercise annually, and our second climate-related financial disclosure was published in June 2021. This report further embeds climate change within our governance and risk management frameworks, progressing further reduction in emissions from our physical operations, and enhancing our analysis of the climate risks in our financial asset holdings using the latest data and modelling techniques.

Financial operations

In March 2020, Governor Andrew Bailey outlined our intention to assess ways that our holdings of corporate bonds could be adjusted our intention to assess ways that our holdings of corporate bonds could be adjusted to take the climate impact of issuers into account while still meeting our monetary policy objectives.

In May 2021, we set out in a Discussion Paper our proposals for ‘greening’ our Corporate Bond Purchase Scheme (CBPS). Andrew Hauser, our Executive Director for Markets, set out the proposed approach of this Discussion Paper in It’s not easy being green – but that shouldn’t stop us: how central banks can use their monetary policy portfolios to support orderly transition to net zero - speech by Andrew Hauser.

The purpose of this Discussion Paper was to seek feedback on the principles that might guide how best to incentivise transition to net zero via the CBPS; and the tools we might use to do it. It highlighted some of the key challenges and design choices we need to grapple with ahead of implementing any changes later this year and set out a number of questions on which we gathered feedback. Responses to the discussion paper closed on 2 July 2021. 

Physical operations

We are committed to running our own physical operations responsibly and sustainably.

In 2020, we set a target of reducing our absolute greenhouse gas emissions by 63% from 2016 to 2030, covering our Scope 1 emissions (use of natural gas, fuel and refrigerants), Scope 2 emissions (electricity) and Scope 3 emissions (travel). This level of reduction is consistent with aligning emissions from our physical operations to the goals of the Paris Agreement.

We remain on track to meet our 2030 carbon target, but recognise we need to go further. In June 2021, we committed to target net-zero greenhouse gas emissions for our physical operations by 2050 at the latest.

Our Greener Bank programme aims to reduce the environmental impact of our day-to-day operations.