The Bank of England’s Q2 Quarterly Bulletin focuses on an area of risk that is considered increasingly significant by a number of investors. No, not liquidity levels, ring-fencing, or consumer fees; instead, the BoE has enumerated its concerns regarding the banking sector’s vulnerability to the impacts associated with climate change.
The BoE bulletin provisionally outlines the financial risks posed by climate change as falling under two headings: the physical risks arising from climate and weather-related events; and transition risks arising from the necessary transition to a lower-carbon economy.
In discussing what the Bank can do to mitigate these risks, it acknowledges that while the mitigation of climate change has historically been seen as firmly within the domain and agency of government, “there is growing recognition of the role of participants within the financial system, including central banks and financial regulators, to mitigate financial risks from climate-related factors.”
Indeed, other stakeholders such as asset managers are putting increased emphasis on this area of risk. For example, in 2016, BlackRock outlined how it incorporates climate change awareness into its investment processes and detailed how climate change presents market risks and opportunities to its investments. In early 2017, State Street also announced that it would begin pressing companies about how they are preparing for the impact of climate change on their businesses.
The Bank outlines its strategy as consisting of two core elements: incorporating climate-related financial risks as part of its approach to prudential supervision; and supporting an orderly transition to a lower-carbon economy to enhance the UK financial system’s resilience.
Of particular interest to investors may be the Bank’s reference to the Financial Stability Board Task Force on Climate-related Financial Disclosures (“TCFD”), the final report of which is due to be published ahead of the G20 Summit in July. The TCFD has developed a much-anticipated reporting framework wherein an issuer’s governance of climate-related risks and opportunities is one of the four thematic areas of recommendations on climate-related financial disclosure.
It will be interesting to see how UK financial institutions report on their cooperation with the Bank of England on climate change in future annual reports; and how their governance structures enable them to take a role in mitigating the risks of climate change, both to their own bottom lines and to the resilience of the system as a whole.
For more information on investor considerations relating to climate change and sustainability reporting, you can request a copy of Glass Lewis’ In Depth reports. (Clients can access In Depth and other Special Reports via glasslewis.net, or by contacting their client service manager)