Bank of England: finance bodies should assess climate risk

In discussion paper issued by UK’s central bank, finance world considers how it could green its investments

An increase in extreme weather events is likely to severely impact financial institutions, says new discussion paper (Pic: NASA/Flickr)

An increase in extreme weather events is likely to severely impact financial institutions, says new discussion paper (Pic: NASA/Flickr)

By Ed King

Leading financial institutions should start to take the threat posed by climate change more seriously, a discussion paper published by the Bank of England has suggested.

The One Bank Research Agenda, released on Wednesday, warns global warming could have “significant effects” on markets and financial bodies.

“Fundamental changes in the environment could affect economic and financial stability and the safety and soundness of financial firms, with clear potential implications for central banks,” they write.

“To date, the Bank’s work in this area has primarily focused on how insurance firms might adapt to the effects of climate change given that any future increases in the frequency and severity of weather-related catastrophes places the industry at the front line of responding to the financial impacts of climate change.”

As an example of how fast changes can occur, the paper cites the rise of digital currencies which, it says, are now shaping the way the banks operate and how they drive revenue.

“New technologies have radically and permanently reshaped both the financial and real sectors of the economy,” it says.

It adds that central banks must start to consider the safety of fossil fuel investments, given the long term need to decarbonize the world’s energy systems and move away from oil, gas and coal.

Last October the Bank of England’s governor Mark Carney said the “vast majority” of fossil fuel reserves were unburnable if temperature rise were to be limited to 2C.

The idea that this will cause stranded assets that could result in a “carbon bubble” has the support of the World Bank, IMF and the UN’s climate body, along with green NGOs.

And the authors say that insurance companies could face increasing demands if and when extreme weather events increase as a result of rising temperatures.

“Physical risks, such as catastrophic weather events, could affect economic growth, particularly in developing countries, and be translated directly into financial losses through an increase in insurance claims,” they write.

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