Bank of England tells banks to take climate action now or face slashed profits

div classBodysc17zpet90 cdBBJodivpBy Huw Jones and Andy Brucep

pLONDON Reuters – Banks and insurers which fail to properly manage climate risks could face a 10 to 15 hit to annual profits and higher capital requirements, the Bank of England said on Tuesday.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pIn its first comprehensive stress test of how Britain‘s financial system’s will cope with climate change and stresses from the shift to a net zerocarbon economy by 2050, the BoE said action now would lower future costs.p

pBanks and insurers would be able to manage the costs of moving to a netzero economy if they act now – or else costs will mount, including for customers, the BoE said.p

p“The first key lesson from this exercise is that over time climate risks will become a persistent drag on banks‘ and insurers’ profitability – particularly if they dont manage them effectively,” said BoE Deputy Governor Sam Woods in a speech.p

p“While they vary across firms and scenarios, overall loss rates are equivalent to an average drag on annual profits of around 1015.”p

pBanks face pressure from climate activists to cut financing to fossil fuel projects.p

pBut Woods said banks and insurers would need to continue financing more carbonintensive sectors of the economy to help them transition to a low carbon future.p

p“Cutting off finance to these corporates too quickly could prove counterproductive, and have wideranging macroeconomic and societal consequences, including through elevated energy prices – potentially akin to those whose negative effects we are experiencing today.”p

pIn the most severe climate change scenario posed by the BoE, where no additional measures are taken to reduce the rise in global temperatures, banks and insurers test could face total losses of up to 350 billion pounds if they take no action.p

p“To the extent that climate change makes the distribution of future shocks nastier, that could imply higher capital requirements, all else equal,” Woods said, adding that a debate was to be had.p

pProperties at risk of flooding would become prohibitively expensive to insure under the severe scenario, the BoE said.p

pThe BoE tested the ability of 19 banks and insurers to understand how climate change will affect their business models and if they hold enough capital to cover climaterelated risks like catastrophes, or falls in the value of property and other assets on their books.p

pThe Bank had already said there would be no pass or fail mark due to the tests experimental nature, and that the results would not determine capital requirements for now.p

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pKeywords: BRITAIN BOECLIMATEp

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