BOE Warns of Banks Doing Too Little, Too Late on Climate Change

(Bloomberg) -- When it comes to planning for climate change, most U.K. banks are taking a relatively narrow, short-term approach, according to the Bank of England.

A majority of lenders are beginning to treat the consequences of climate change like other financial risks, rather than simply a corporate social responsibility. Still, only about 10 percent are taking a long-term “strategic” approach to the issue, while 60 percent are looking just three to five years ahead, the BOE found in a survey.

“A ‘too little, too late’ scenario, where significant action is taken -- but too late to achieve climate goals -- could result in the most severe financial risks crystallizing in the banking sector,” the BOE said. “Financial risks from climate change will be minimized if there is an orderly market transition to a low-carbon world, but the window for an orderly transition is finite and closing.”

Climate change could affect the financial system both physically -- through droughts, storms and rising sea levels -- and as a result of the costs and opportunity from the transition to a low-carbon economy. For example, policy, technology and sentiment changes may alter the valuations attached to a range of assets, leading to both winners and losers in the banking sector.

Ninety percent of banks said climate change is likely to pose a credit risk, with borrowers or counterparties defaulting on their obligations. Twenty percent highlighted the risk of losses from adverse movements in the market prices of assets such as securities. And six in 10 banks identified climate change as a factor that could increase their operational risk profile.

Companies accounting for 90 percent of the U.K. banking industry, with more than 11 trillion pounds ($14 trillion) of assets, took part in the survey.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Andrew Blackman, Paul Armstrong

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