UK insurers, reinsurers, and brokers have been told that the financial services regulator is moving toward a mandatory system of disclosure on climate change impact.
Sarah Breeden, the Bank of England’s Executive Director, UK Deposit Takers Supervision Executive Sponsor for Climate Change said the time for action had come and the threat from climate change needed to be addressed today not tomorrow.
While the Bank says it will seek to mandate the disclosure of firm’s carbon footprints the concern for the insurance industry may well be the approach the bank may take to the provision of cover for companies and risks which are seen to be exacerbating climate change.
Ms Breeden was speaking at a UK Finance Webinar held during London Climate Action Week and warned the BoE was set to demand action from those it regulates across the financial services sector.
“The Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) provides the go-to framework for companies to disclose key climate-related information,” she explained. “This initiative has significant backing, with over a thousand companies showing their support. But support alone is not enough, we need action. And the quantity and quality of climate disclosures is not yet good enough.
“Climate change is a risk we see looking forwards not backwards. Companies with the exact same current carbon footprint today could have very different strategies for the future – one might have a clear path to net-zero, another could be gambling on new technology or policy inaction, and a third might just not have thought about it yet.
“So, to be decision-useful, disclosure has to move from the static to the strategic. To be forward looking. Using scenario analysis to help us better understand the impact of different climate pathways.
“That naturally raises the question as to whether disclosure should be mandatory. Given the scale of the change required, we think that does need to happen, and soon. And so we, together with other regulators, are exploring a possible pathway to mandatory through the Government-led taskforce on climate disclosure. But you do not need to wait to be forced to disclose. You can choose to act now.”
Ms Breeden explained that the impact of climate change had to be understood if it is to be addressed.
“I realise that this may seem an odd claim for a central banker to make in the middle of a global pandemic that has already led to the largest fall in UK growth in over three hundred years,” she added. “But our economy and financial system, with the right support, should eventually recover from Covid-19. In contrast, climate change, left unchecked, will lead to irreversible harm for generations to come. That demands our continued attention even as we deal with the current crisis.
“We are at the start of a critical decade for climate action where the decisions we take today will shape the future of our planet for decades to come. ‘Action’ being the key word.
“If the previous decade was marked by a ‘call to action’, then this coming decade must answer it. That means an economy-wide orderly transition to net-zero emissions. We all have a role to play in that. And the financial sector should be instrumental in driving that change.”
Ms Breeden added that while climate change matters for the environment and for our planet, what has become self-evident now, even if it was not five years ago, is that climate change creates financial risks.
“These can arise from physical risks, whether acute weather events like floods and wildfires, or longer-term climate trends like the rise in sea level and record-breaking temperatures in the Arctic Circle.
“They can also arise from transition risks – the changes in government policy, technology and consumer preference that move our current emissions pathway towards one consistent with net-zero. And let me remind you that the need to transition is economy wide, not just in the energy sector – in transportation, agriculture, real estate, all parts of industry, even sovereigns.
“They will affect every consumer, every corporate, in all sectors and across all geographies. Their impact will likely be correlated, non-linear, irreversible, and subject to tipping points. They will therefore occur on a much greater scale than the other risks we are used to managing.”
“It is difficult to say now what exact combination of physical and transition risks we will experience,” added Ms Breeden. “But what is absolutely certain is that some combination of these risks will materialise – either we continue on our current emissions pathway and face physical risks or we change our emissions pathway and face transition risks. And we cannot let that uncertainty lead to inertia and inaction.
“So, we need leaders to take bold steps and adopt a forward-looking strategic view of the risks – and the opportunities – from climate change. That means stretching beyond your typical business planning horizons and taking different decisions today, decades before the consequences of inaction become clear.”