UK is Stress-Testing Banks for Climate Risk; All Nations Should


A week before Christmas, the Governor of the Bank of England, Mark Carney, wrote in the Financial Times that the UK is now stress-testing banks for climate risk and resilience. Specifically, he writes:

Modelling for the full extent of climate-related financial risk is complex and challenging. Britain can lead the way next year, when we and Italy host COP26 climate negotiations in Glasgow. This critical meeting will occur five years after 195 governments agreed in Paris to enact policies to limit a global temperature rise to well below 2C above pre-industrial levels. Since then progress has been uneven and insufficient. Ambitions for Glasgow must be high to arrest the growing climate crisis.

The financial sector can play a decisive role — provided it understands the risks and develops the tools to manage them. The Bank of England’s latest survey of the banking sector, found that almost three-quarters, representing $11tn of assets, are starting to treat climate risks like other financial risks. The UK financial system is becoming a leader in sustainable finance, but we need to go much further and bring others with us.

This is policy-level recognition of macrocritical resilience as a foundation of sustainable prosperity. The risk and resilience modeling or stress-testing must be done, both for reasons of intensifying transition risk and geophysical climate impact risk.

There is steadily mounting straight financial risk for any institution that is not accounting for climate-related risks. With 3/4 of banks surveyed, representing $11 trillion in assets, now treating climate-related risks as balance-sheet impacting risks, they will be building efficiencies into their entire portfolios, while others remain saddled with the riskier technologies, operations, suppliers, and holdings.

Transition risk—the risk of falling behind market leaders and the mainstream, through delayed action—and climate impact risk, together with the redirection of public resources to deal with both, across whole economies, will mean the least innovative, least attentive and collaborative institutions, will find resources they depend on disappearing.

For ease of use, this could be described as a fiscal resource-shifting risk—subsidies, tax credits, conditional central bank lending, insurance assistance, routine small-business support, and development aid, will all shift away from climate-disrupting activities toward the pressing needs they have generated.

Another factor is the rapidly declining Carbon Budget—the total remaining allowable amount of climate-disrupting carbon emissions.

  • The Carbon Budget is defined by geophysical impacts and influences, and cannot be modified by market dynamics.
  • The IPCC’s 2018 Special Report on Global Warming of 1.5ºC had estimated the remaining budget to be roughly 420 gigatons of CO2-equivalent global heating emissions.
  • Accounting for permafrost melt, in the IPCC’s 2019 Special Report on the Ocean and Cryosphere, has revealed the Carbon Budget to be only 300 gigatons.
  • The Carbon Budget is also declining rapidly due to ongoing and expanding emissions, time passing, and the compounding impacts of global heating.

The critical insight inherent in a quick glance at the Carbon Budget is that carbon emitting business models will be non-viable far sooner than anyone is so far planning for. All industries that depend on climate disrupting pollution will be at risk of collapse within the next decade.

To succeed in avoiding the worst of catastrophic climate disruption, the global financial sector will have to be 100% climate-smart no later than 2040.

In 2020, all stakeholders and leaders—that is, all affected parties whose futures will be influenced by the climate-smart technology and investment transition—need to develop coherent, science-based strategies to transcend the market-dynamic traps of the status quo high-pollution economy.

Categories: Macrocritical Resilience
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