Bank of England
Why macroprudencial policy needs to tackle financial stability risks from climate change
Elisabeth Stheeman

Financial stability risks from climate change

In this speech, Elisabeth Stheeman, External Member of Bank of England´s Financial Policy Committee (FPC), explains how climate change and the transition to net zero have big consequences for the economy and the financial system and how Central Banks and Supervisors will contribute to progress towards assessing and mitigating the financial risks from climate change, an important role since a failure to price climate risks sufficiently could lead to significant financial losses and financial instability.

Key findings from the speech:

  • A systemic risk to the financial system can be seen through two main channels:
  1. Physical risks can arise from damage to property, land and other infrastructure as well as disruption to business supply chains and food systems.
  2. Transition risks stem from the move towards a net zero economy, arising from changes in climate policy, technology and shifting consumer preferences. The implied change in energy costs has already been having a significant effect on many businesses.
  • Climate-related risks could destabilize capital markets and have potential to cause disruption across the broader economy. Firms cannot diversify away from their exposure to the planet and in that sense, climate change could be described as the ultimate systemic risk.

  • The financial system has an important role to play in supporting an orderly transition to net zero but a shared responsibility: Responsibility for achieving net zero lies with government through setting climate policy, with industry through innovation and climate action, with private finance through facilitating investment to support those changes, and with consumers through the spending and personal investment choices they make.

  • The FPC´s role is to ensure that the financial system is resilient to climate-related financial risks, and thereby it can support the transition to net zero. In this regard, the Bank of England is now focusing on further exploring major UK banks and insurers´ prospective responses to the crystallization of climate risks and expects to publish results in May.

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