The Bank of England has told banks and insurers it is ready to use its powers to clamp down on them if they fail to manage climate risks.
The warning has come as the central bank begins to consider a possible introduction of capital requirements linked to non-durable assets.
The Bank said on Thursday it would take a more active approach to the climate crisis in the New Year, when businesses in the city are expected to demonstrate good understanding and management of the associated financial risks. Those who fall behind would face the action of his regulatory arm, he said.
In a climate adaptation report released Thursday, the Bank’s Prudential Regulatory Authority (PRA) said such action could include ordering a “qualified person” review of offending companies that could lead to a “deep audit” or additional oversight.
The regulator said it also has the power to impose additional capital requirements related to assets with climate risks.
Capital requirements determine the type of financial buffers banks need to have to protect themselves from risky loans and products on their balance sheets. They can act as a deterrent, as capital rules make risky assets more expensive to hold.
“Where progress is insufficient and assurance or correction is needed, the PRA will ask for clear plans and, where appropriate, consider exercising its powers,” the Bank of England said.
Positive Money climate activists welcomed the announcement, saying the capital requirements could help reduce the amount of funding provided to polluting companies.
“After months of pushing back on ensuring that capital rules reflect climate risk, believing that banks can be left to fend for themselves to solve this systemic problem, it is positive that the Bank of England appears to recognize the need for stricter regulation, ”said David Barmes, senior economist at Positive Money. “Such reforms are long overdue and policy makers should act to implement them without delay. “
However, the Bank has signaled that it is unlikely to roll out capital rules until it conducts a further review in 2022 of the use of the rules, which would also allow it to complete its first few. weather stress tests involving the UK’s largest banks.
The Bank explained that the complex nature of climate predictions and transition trajectories, which span decades, make it more difficult to assess the value of climate risks. “As a result, research and analysis on sizing climate-related financial risks for capital purposes is nascent and not always conclusive,” he said.
The regulator also said capital requirements were likely to target the consequences rather than the causes of climate change. This could mean that setting capital requirements would be based on the effects of government climate policies, rather than those assets being linked to higher carbon emissions.
Banks, for example, may have to hold capital against loans to manufacturers of gasoline vehicles due to the fact that the UK plans to ban the sale of these vehicles by 2030. It is less likely that the regulator requires banks to hold capital against loans granted. to fossil fuel producers, unless it is part of the government’s transition plan.
The PRA has already started an initial review of the use of capital requirements to protect against climate risks, but will request further research and hold a conference on the issue in 2022 before releasing guidance.