Our open letter to the Financial institution of England calls on them to take motion to forestall local weather breakdown
Within the absence of sturdy regulation, the monetary sector continues to gasoline the local weather disaster by lending to and insuring dangerous fossil gasoline tasks which not solely threaten our planet, however expose the economic system and monetary sector itself to rising dangers ensuing from environmental breakdown.
The Local weather and Capital convention this week, organised by the Financial institution of England and, the Prudential Regulation Authority (PRA) to take a look at the position of monetary regulation in addressing these dangers is due to this fact a key second.
To push for decisive motion by our monetary regulators, we’ve got written an open letter to Governor Andrew Bailey and PRA CEO Sam Woods endorsed by main thinkers and lecturers, calling for them to interrupt the finance-climate ‘doom loop’ through which monetary actions proceed to gasoline local weather disaster and in flip improve dangers to the monetary system itself.
The local weather disaster poses a grave and rising risk to the monetary system and macroeconomic stability in two methods:
- bodily dangers, ensuing from the growing frequency and severity of extreme climate occasions and environmental injury that can hit the economic system and result in monetary losses
- transition dangers, because the UK and different economies transition in direction of net-zero emissions, fossil gasoline belongings will more and more decline in worth (to zero) and finally grow to be ‘stranded’
The Financial institution has an necessary position to assist the federal government in mitigating these dangers. When banks or insurance coverage firms make loans, they must hold a specific amount of funds on their steadiness sheet to cowl any potential losses. These are referred to as ‘capital necessities’ and the Financial institution of England ought to alter these to make climate-risky actions dearer to fund.
We name on the Financial institution to undertake a robust precautionary method, taking the required measures upfront earlier than the worst impacts of local weather breakdown materialise by:
- Introducing greater danger weights on any belongings linked with new fossil gasoline manufacturing in step with a ‘one for one’ rule, the place every pound of financing for such actions should be matched with one pound of a lender’s personal funds.
- Adjusting danger weights on current fossil gasoline belongings over a gradual phase-in interval to appropriately replicate their greater danger of shedding worth
By growing capital necessities on monetary actions that contribute in direction of local weather breakdown, notably lending to and insuring new fossil gasoline tasks, accountable and forward-looking regulation can break the finance-climate ‘doom loop’ through which monetary actions proceed to gasoline the local weather disaster and in flip improve dangers to the monetary system itself.
The fundamental (minimal) capital necessities are set by the internationally agreed Basel framework. The Financial institution of England, lengthy one of many thought leaders in contemplating climate-related dangers, ought to now lead by adjusting its capital framework accordingly and use the necessary voice it has within the worldwide standard-setting our bodies such because the Basel Committee to push for a world algorithm that handle climate-related monetary stability dangers at a world stage.
Learn the open letter.