Bank of England tells banks: 'Take climate action now or face profits hit'

Bank of England tells banks: ‘Take climate action now or face profits hit’

May 24, 2022

The Bank of England has told banks to take climate action immediately or face a hit to annual profits of up to 15%.

The warning comes following the first comprehensive examination of how Britain’s financial system will cope with climate change and the stresses involved in shifting to a net zero-carbon economy by 2050.

The BoE said that banks and insurers would be able to manage these costs if they acted now – but any delay could mean higher costs for them and their customers.

BoE Deputy Governor Sam Woods said: “The first key lesson from this exercise is that over time climate risks will become a persistent drag on banks’ and insurers’ profitability – particularly if they don’t manage them effectively.

“While they vary across firms and scenarios, overall loss rates are equivalent to an average drag on annual profits of around 10-15%.”

The stress test involved measuring the ability of the 19 banks and insurers to understand how climate change will affect their business models and if they hold enough capital to cover climate-related risks.

These could include things like a fall in the value of property and other assets on their books, although there is no pass or fail mark as the test is still experimental in nature.

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The most severe scenario posed was one where no additional measures were taken to cut the rise in global temperatures.

Under this scenario, properties at risk of flooding would be almost impossibly expensive to insure, and banks and insurers could face losses of up to £350bn if they took no action.

Mr Woods said: “To the extent that climate change makes the distribution of future shocks nastier, that could imply higher capital requirements, all else equal.”

But Mr Woods warned that banks and insurers would have to keep financing carbon-intensive sectors of the economy to ease the net-zero transition.

“Cutting off finance to these corporates too quickly could prove counterproductive, and have wide-ranging macroeconomic and societal consequences, including through elevated energy prices – potentially akin to those whose negative effects we are experiencing today.”

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