Banks ‘off the hook by weak climate regulation’ | bank of england
The Bank of England faces criticism of how it conducts its first weather stress tests, with politicians and campaigners warning that a lack of penalties for dirty assets will provide little incentive for banks to clean up their act.
While the regulator has been praised for committing to the exercise, the Bank of England has been criticized for refusing to release data for individual companies so far and has failed to introduce reporting requirements. capital, making it more expensive to provide loans and services to fossil fuel companies and high carbon projects.
Campaigners fear one of the UK’s most lucrative industries will receive a free pass.
“Finance is a top priority for Cop26, but the UK’s credibility as a host risks being undermined by letting its banks invest more than £ 200bn in fossil fuels since the signing of the Paris Agreement, ”said Green MP Caroline Lucas. Guardian. “He must rectify these failures if he is to have any credibility in the climate finance negotiations.”
The Bank of England is not the only regulator to act with caution. So far, the European Central Bank and the Banque de France – which are among the few central banks to have conducted weather stress tests for their respective financial sectors to date – have only released aggregate data covering their industries. financial and did not introduce any restrictions. , or dissuasive, for banks serving polluting companies.
This despite warnings from the two regulators that banks will be severely affected unless they step up their response to the climate crisis.
According to the rating agency Moody’s, any deviation from the Paris agreement would lead to an increase in loan losses for banks, ranging from 3.5% in the “least disorderly” scenario to 20% in weather conditions. the most extreme. He raised concerns that the banking sector itself would suffer financially without swift action, which could have a ripple effect throughout the global economy.
Globally, reporting standards are low. A report by the Climate-Related Financial Disclosures (TFCD) Task Force released last year found that although banking reports have improved since 2017, the industry continues to have the lowest percentage of disclosure for financial institutions. climate-related targets in all global industries, with 19% of companies meeting TFCD standards. By comparison, the figures for the energy and transport sectors are 44% and 35% respectively.
Part of the challenge is that regulators intend to collect as much data as possible before introducing disincentives such as capital requirements, which determine the kind of financial cushion that banks need to hold for. protect them from risky loans and products on their balance sheets.
With such a complex exercise examining potential climate scenarios over the next 30 years, campaigners say the Bank of England could give itself an impossible task.
His first climate tests – which he has not yet committed to repeat after this year – are much more complex than the regulator’s annual financial stress tests, which were introduced after the 2008 banking crash and measure the resilience of banks. in the face of economic shocks such as soaring unemployment. , or a sudden collapse in house prices.
Instead, the climate tests will subject banks to three scenarios with a 30-year time horizon, covering physical and transition risks, including one in which governments do not take additional steps to reduce greenhouse gas emissions. greenhouse, resulting in an average temperature rise of 3.3 ° C, and a 3.9 meter rise in sea level. The exercise will also examine how these scenarios might affect potential loan losses, as customers are not repaying their loans due to slower growth and economic uncertainty.
“If you are looking for the perfect data set, you will be disappointed because it will never happen – there is always uncertainty,” said James Vaccaro, executive director of the Climate Safe Lending Network, which represents the banks. , academics and investors wishing to decarbonize the banking sector. “You’re always trying to extrapolate the past, but right now in terms of climate change, the past is not at all a good predictor of the likely future,” he said.
If that wasn’t enough, the Bank of England is also letting lenders determine how they individually measure their exposure to these climate risks, a move it says will drive innovation and uncover best practices that can be shared across the board. of the sector. However, this means it will take even longer for UK banks to produce comparable data that will help the public, governments and investors determine where they need to exert the most pressure or do their business.
“At the moment, the financial system enables and funds the forces that drive climate change,” said Lord Oates, Liberal Democrat spokesperson for energy and climate change in the Lords. “And so regulators have a duty to act now [and] in the absence of perfect information.
International regulators have proven they are willing to take capital requirements into account when new risks emerge. In June, the Basel Committee on Banking Supervision, which is made up of regulators from the world’s major financial centers, highlighted the potential risk associated with cryptocurrencies such as bitcoin, saying banks should be forced to set aside enough capital to cover 100% of potential losses.
Campaigners are calling for similar rules for climate risks. Last week, activists and academics, including historian Adam Tooze, signed an open letter to Cop26 president Alok Sharma, calling for the introduction of one-for-one capital requirements, which means that for for every pound invested in fossil fuel projects, financial institutions such as banks and insurers would have to hold the equivalent to absorb future losses.
But not all central bankers are convinced that capital requirements on dirty assets will fully protect against financial shocks, as renewables and other innovative green assets could carry investment risks. There are also fears that the introduction of capital requirements could cause market turbulence, as forcing large numbers of banks to raise funds simultaneously could scare off investors and make it more expensive for lenders to obtain funds.
However, Vaccaro warned that short-term pain may be needed to create a sustainable future for the climate and the financial system.
“We are potentially and unintentionally, perhaps even unconsciously, sacrificing long-term stability for short-term stability. In other words: don’t shake the basket of apples now. But by not shaking it, we totally hamper it in the perspective of making it fit for the massive shocks we expect.
The Bank of England said in a statement that “climate scenario exercises are new and complex in several ways.” A spokesperson said he started the exercise without having a perfect framework in place because it might have taken years to do otherwise.
“One of the main intentions of the exercise was to build capacity and in some ways to learn by doing. Therefore, we do not believe that individual disclosure at the corporate level at this stage is appropriate. “