A novel study published on the Bank of England’s (BoE) Bank Underground blog has found that 10% of UK bank assets are either directly or indirectly exposed to risks and opportunities associated with the transition to a net zero economy. While most of these assets are in carbon-intensive sectors and thus are exposed to risk, the analysis finds that 17% will likely benefit from climate transition plans.
While most studies of the financial effects of the transition away from carbon focus exclusively on risk, the three senior BoE staff who conducted the analysis say that assessing the trade-off between both risks and opportunities is important for providing a holistic assessment of the financial system’s resilience.
To assess transition risk, the study used the climate policy relevant sectors (CPRS) classification of economic activities that could be affected, either positively or negatively in a disorderly low-carbon transition. Based on energy sources, the CPRS categorises activities in the fossil fuel, utility, energy intensive, buildings, transportation and agricultural sectors according to their direct and indirect emissions, relevance for climate policy implementation and role in the energy value chain.
Applying the CPRS categories to a BoE granular data set on exposures in the UK banking systems, the study found that direct exposures amounted to 6.1% of total assets, rising to 10% when indirect exposures were included. However approximately one-sixth of this exposure was to opportunity, the study found, with opportunities defined by holdings in green sectors such as renewable energy.
Despite the opportunities identified, “exposures of financial firms incorporate a carbon footprint and represent a large chunk of the UK banking sector’s assets”, the authors conclude, adding that this highlights “a pressing need for central banks, regulators and financial firms to accelerate their capacity to assess and manage these risks”.
Covering 90% of the UK’s banking system, the study complements the BoE’s recent stress test of 19 systemically important financial institutions. However, unlike the Bank Underground analysis it only focused on transition risk and did not measure exposures to climate-related physical risks.
This page was last updated August 18, 2022
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