This week the Bank of England published the results of its climate biennial exploratory scenario (CBES) analysis, which used “stylised scenarios” to examine the financial risks posed by climate change for the largest UK banks and insurers.
The analysis found that climate risks, particularly when not managed most effectively, are likely to create a significant drag on the profitability of banks and insurers, with overall loss rates equivalent to approximately 10-15% per year.
“These are big numbers, and the limits of the exercise mean the actual impact could well be larger due to some significant exclusions,” said Sam Woods, the Bank of England’s deputy governor for prudential regulation, in a speech.
However, he went on to note that based on the CBES findings, the costs of a transition to net zero “look absorbable for banks and insurers, without a worrying direct impact on their solvency”.
“By themselves, these are not the kinds of losses that would make me question the stability of the system, and they suggest that the financial sector has the capacity to support the economy through the transition,” he said.
Woods cautioned that although this could appear positive, it should be taken with “a major pinch of salt”, firstly because of the uncertainty in the projections, and because the drag on profitability would leave the sector more vulnerable to other, future shocks.
“A world with climate change is a riskier one for the financial system to navigate,” he said.
The climate risks to banks and insurers considered in the CBES analysis included a fall in the value of property and other assets.
Under one of the most severe scenarios tested, where no additional measures were taken by banks to mitigate against rising temperatures, the risks considered included homes at risk of floods becoming “prohibitively expensive” to insure or borrow against, even potentially becoming uninsurable.
Woods said that overall, the findings of the CBES exercise should be taken as a “good news story”, with the Bank of England encouraged by the progress firms have made, but he added there was still more they needed to do.
The Bank of England report comes a week after it emerged that a senior HSBC executive had accused central bankers and other officials of exaggerating the financial risks of climate change, during an address at the Financial Times’ Moral Money Summit.
Stuart Kirk, who has since been suspended, was global head of responsible investing at the bank’s asset management division, and told delegates that throughout his 25-year career in the finance industry “there was always some nut job telling me about the end of the world”.