THE HEAT IS ON FOR THE NEW BANK OF ENGLAND GOVERNOR
If “the world is on fire”, as Greta Thunberg recently suggested, then our banking and financial system is helping to fan the flames. This is why 101 leading influencers from across finance, civil society and academia have signed a letter calling on incoming Bank of England governor Andrew Bailey to align finance with the government’s goals of a low carbon transition.
The Bank of England’s outgoing Governor, Mark Carney, has helped pioneer the fight against climate breakdown in the financial sector. But despite many positive steps in the right direction, policy action at the Bank is nonetheless still lagging behind the rhetoric.
The letter, addressed to incumbent governor Andrew Bailey, has been co-ordinated by research and campaign groups Positive Money, Greenpeace, the SOAS Centre for Sustainable Finance, E3G, LSE Grantham Institute and the New Economics Foundation. It warns that measures taken by the Bank of England “are unlikely to be enough” to help the government meet its climate targets.
As the Bank of England recently recognised, the financial system is still on track to fund a 4 degree temperature rise. Since the Paris Climate Agreement was signed in 2015, the world’s leading banks (including the UK’s big four: Barclays, HSBC, RBS, and Standard Charter) have poured $1.9 trillion into fossil fuel financing.
As we have previously noted, climate change and the transition towards a low carbon economy poses a clear and systemic danger to the financial system. But crucially, these risks are not being priced in by financial markets. Ensuring the financial system is fully resilient to climate-related financial risks falls squarely within the current mandate of the Bank, so it must be a top priority for new governor Andrew Bailey
The 101 signatories of the letter urge Bailey, who will take over from Carney on 16 March, to use his position as head of Britain’s central bank “to lead the way” in aligning finance with the 1.5C target aimed for in the Paris Agreement ahead of this year’s COP26 summit in Glasgow. The letter calls on Bailey to take three specific steps towards this:
- Make it mandatory for firms to disclose climate risk “as soon as possible”.
- Exclude fossil fuel assets from both future rounds of quantitative easing (QE) and the assets the Bank accepts as collateral, so it can “lead by example”.
- Considering integrating climate-related financial risks into the Bank’s macro-prudential framework.
All three of these policy asks echo recommendations previously made by NEF.
The first recommendation ensures that financial institutions come clean on climate, by transparently disclosing the risks global heating poses to their operations. In theory, more transparency will allow markets to better price-in risks by providing information about the climate risk exposure of companies and financial institutions. Currently, the framework for disclosing climate risks is voluntary– and uptake has been weak. The Bank of England has in fact warned the financial sector that they have two years to improve their reporting on climate risks otherwise disclosures could be made mandatory. However, given the urgency of action needed on climate these disclosures should have been mandatory by yesterday.
Although necessary, mandatory disclosures will by no means be sufficient. This is why our second and third recommendations call on the Bank to green its policies and integrate climate risks into its own operations.
At present, the Bank’s monetary policy and prudential operations are laced with a carbon bias – skewing finance towards carbon and fossil fuel intensive activities. This reinforces climate-related financial risks and directly contravenes the spirit of the Paris Climate Agreement. Leading by example and integrating climate risks (starting with coal) into the Bank’s own monetary and prudential operation would be a sensible, practical place to start for Governor Bailey to make his first interventions.
Fortunately, incoming governor Bailey has a strong foundation (perhaps the best in the world) on which to build. And while plaudits have all too often gone to outgoing Governor Carney, Bailey’s work on climate change at the Prudential Regulatory Authority and Financial Conduct Authority also deserve praise.
It is in this vein that we look forwards to Bailey plans for addressing climate risks and carrying on the commendable work of the Bank — not just as a thought leader, but through the action it takes.