The transition to net zero carbon emissions is both a physical necessity to stabilise the global rise in temperatures and the law of the land in the UK. To achieve net zero, companies must put a transition plan in place, creating enormous opportunities and major risks. Modelling for the full extent of climate-related financial risk is complex and challenging. Britain can lead the way next year, when we and Italy host COP26 climate negotiations in Glasgow. This critical meeting will occur five years after 195 governments agreed in Paris to enact policies to limit a global temperature rise to well below 2C above pre-industrial levels. Since then progress has been uneven and insufficient. Ambitions for Glasgow must be high to arrest the growing climate crisis.
The financial sector can play a decisive role – provided it understands the risks and develops the tools to manage them. The Bank of England’s latest survey of the banking sector, found that almost three-quarters, representing $11tn of assets, are starting to treat climate risks like other financial risks. The UK financial system is becoming a leader in sustainable finance, but we need to go much further and bring others with us.
The BoE has been focusing on improving measurement and management of climate risks, building on the expectations our supervisors set for banks and insurers on their governance, risk management, scenario analysis and disclosure. Now we are publishing our groundbreaking new framework to stress test the largest UK banks and insurers for climate risks. We will ask firms to model their exposures to three climate scenarios: the catastrophic business-as-usualscenario where no further climate action is taken, a scenario where early policy action delivers an orderly transition to the targets set in Paris, and a third where late policy action leads to a disorderly and disruptive transition.