UK banks need to face tougher climate regulations, investors warn Bank of England

February 12, 2024|Written by Katy Lee|Bank of England

A group of investors has written to the Bank of England (BoE) warning that UK banks may not be holding enough capital to cope with the impact of climate change, and urging tougher regulations to force them to factor the real risks into their operations.

The 29 January letter was signed by 21 investors, including major Danish pension fund PKA, asset managers Jupiter and KBI Global, and several British higher education institutions such as the University of Leeds and St Hilda’s College, Oxford.

The climate modelling currently used by banks understates the risks, the investors warned, while accounting and disclosures remain “inadequate” when it comes to specifying “how material climate factors have been incorporated”.

The letter also laments the “slow progress in moving towards enhanced capital requirements to protect against systemic climate risks that are unlikely to be ever fully captured in banks’ accounting”. 

“As long-term investors, we are keen to promote more effective climate risk management,” the letter said.

The signatories called for the BoE to carry out “further work around how regulatory capital requirements could better reflect climate risks”, while urging them to issue “explicit guidance to banks that they use severe but plausible climate scenarios” that include the latest scientific understanding on tipping points.

They also suggested the BoE should require banks to disclose the key conclusions from climate stress-testing exercises.

Contacted by Green Central Banking, the BoE declined to comment on the letter, which was addressed to Sam Woods and Sarah Breeden, deputy governors for prudential regulation and financial stability respectively. The investors said they would also be writing to international regulators to voice similar concerns, given the global nature of climate change.

The investors praised the BoE’s pioneering role as one of the world’s first central banks to have recognised the risk that climate change poses to financial stability. “We are keen to see the Bank maintain its leadership,” they wrote.

The BoE was given a specific mandate in 2021 to facilitate the transition to net zero. However, UK chancellor Jeremy Hunt removed climate change from the BoE’s key priorities last November, to the dismay of environmental campaigners.

This page was last updated February 13, 2024

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