17 October 2018
The increasing attention of regulators bodes well for green finance, says Peter Cripps
Regulators are taking an increasing interest in green finance.
It said they should strategically manage and report their climate risks, using scenario analysis.
This follows its report last month into the banking sector which found that only 10% of banks are treating climate change as a strategic risk. For 30%, it is just a corporate, social and responsibility issue.
Three years ago the PRA looked into the risks facing insurers and Bank of England governor Mark Carney gave his landmark tragedy of the horizon speech in which he articulated the problems caused by investors’ short-term focus.
This action from the twin peaks of the UK financial regulatory system – both endorsing scenario analysis and reporting – came at an opportune moment – just days after BP CEO Bob Dudley criticised scenario analysis, saying it was “confusing for investors” because no one knows what the future looks like.
Proponents of scenario analysis say that Dudley is of course right about the uncertainty over the future but add that they want companies to disclose the assumptions on which the scenarios are based, so investors can decide whether they agree with them.
It’s not just in the UK that regulators are taking an interest. The Dutch central bank has for the first time conducted an energy transition stress test of its major banks, insurers and pension funds.
It found that insurers and pension funds could face losses of up to 10% of their assets over the next five years amid the transition to a low-carbon economy.
And other central banks are clubbing together to explore this issue. The Central Banks and Supervisors Network for Greening the Financial System, which was founded at the end of last year and now has 18 members, last week published its first update. It emphasized how climate change could result in large losses and said new analytical approaches were needed including stress tests and scenario analysis.
It said it will publish its first comprehensive report in April next year. In other words, watch this space!
This flurry of activity from regulators is an extremely positive trend because it will act as a catalyst for greater and swifter action from the financial sector.
Mark Carney’s leadership, demonstrated through the tragedy of the horizons speech, has been a key intervention in the evolution of green finance, not just in the UK but across the globe.
Regulators have the power to change behaviour and ultimately mandate action. They will spur the entire financial sector into greater action.
This bodes very well for the future of green finance.
Peter Cripps is the editor of Environmental Finance. These comments were made in the opening address at Environmental Finance's Green Equities conference