BoE published two speeches by Governor Mark Carney, wherein he called for a step change to bring the financial disclosure, risk management, and return optimization of sustainable finance into mainstream financial decision-making. While speaking at the UN Climate Action Summit 2019 in New York, he emphasized that banks, insurers, asset managers, and those who supervise them—all need to improve their understanding and management of climate-related financial risks. While speaking at another event in New York, he also outlined the role of insurance in smoothing the transition to a 1.5-degree world.
Mr. Carney opined that the next step is to make the climate-related financial disclosures mandatory, highlighting that the UK and EU have already signaled their intents in this regard. Over the next two years, the current process of disclosure by the users of capital, reaction by the suppliers of capital, and adjustment of these standards will be critical to ensure that the Task Force on Climate-related Financial Disclosures (TCFD) standards are as comparable, as efficient, and as decision-useful as possible. With respect to risk management, he said that the providers of capital—banks, insurers, asset managers, and those who supervise them—all need to improve their understanding and management of climate-related financial risks.
To develop the essential climate risk management skills and techniques, BoE has just set out its supervisory expectations for the governance, management, and disclosure of these risks by banks and insurers. He also highlighted that BoE will be the first regulator to stress test its financial system against different climate pathways, including the catastrophic business as usual scenario and the ideal—but still challenging—transition to net zero by 2050 consistent with the legislated objective of the UK. This test will mainstream cutting-edge risk management techniques. He added that, similar to the climate-related disclosures, this new risk management needs to go global. This is why BoE is developing its stress testing approach in consultation with industry, the credit rating agencies, and the Network for Greening the Financial System (which is a group of 42 central banks and supervisors representing half of global emissions).
For sustainable investment to go truly mainstream, one of the biggest hurdles is the inconsistent measurement of environmental, social, and governance (ESG) factors. A common taxonomy is needed to help financial markets rigorously identify environmental out-performance and to direct investment accordingly. He said: "The EU’s Green Taxonomy and the Green Bond Standard are good starts, but they are binary (dark green or brown). Mainstreaming sustainable investing will require a richer taxonomy—50 shades of green. One promising option, highlighted in this week’s initiative of UN’s Climate Financial Leaders, is the development of transition indices composed of corporations in high-carbon sectors that have adopted low-carbon strategies."
The BoE Governor concluded that the speed with which the new sustainable finance develops will be decided by the coherence and credibility of climate policies of countries. Finance will complement—and potentially amplify these initiatives—but it will never substitute for climate policy action. The policy frameworks with the greatest impact will be time consistent; transparent; target-based; and committed, through treaties, nationally determined contributions, domestic legislation, and consensus. The more prolific the reporting, the more robust the risk management, and the more widespread the return optimization, the more rapidly the sector can build resilience.
Related Link: Speeches
Keywords: International, Europe, UK, Banking, Insurance, Securities, Sustainable Finance, TCFD, Stress Testing, Climate Change Risks, Disclosures, ESG
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