Bank of England weighs in on climate risks to UK banks

The conversation around climate change continues to evolve with an increasingly broad pool of investors taking interest in CSR and the role it plays in corporate performance and valuation. In the latest move, the Bank of England, the central bank of the United Kingdom, has outlined what it sees as the risks facing the country’s banking system from climate change. Once considered to be primarily an issue for mining companies, oil & gas producers and heavy industry, climate change is now firmly in focus at banks, insurance companies and other financial institutions.

The BoE’s move is a significant shift from the traditional view of climate risk and corporate social responsibility. Historically the role of regulating environmental and social risk disclosures has fallen firmly in the remit of government but the BoE’s Quarterly Bulletin reflects a change in the market that has seen financial regulators, non-government agencies and major institutional investors taking on a more aggressive stance toward risk assessment and disclosures.

The Bank groups climate-related risk into two broad categories: the more obvious physical risks posed by climate and weather-related events; and the more esoteric risks posed by evolving business practices and market risk to the institutions themselves and their portfolio companies as they move toward a low-carbon operating environment. These risks can be significant but not easily calculable, hence the BoE’s call for more enhanced discussion and disclosure.

In another important step, the BoE gave some support to the December 2016 reporting framework put forward by the Task Force on Climate-related Financial Disclosures. The framework analysis encompasses four broad areas of a public company’s climate-related disclosures, one of which includes the governance of risks and opportunities to the financial and investment operations of the company.

This recent move is just further evidence of the rapidly evolving climate change and CSR reporting landscape and the pressure faced by public companies in effectively analyzing and communicating their activities.