The Bank of England has moved quickly to make banks and financial institutions tackle climate change. Ouida Taaffe looks at the monetary costs of climate change and how regulation could impact firms.
This April’s 54% increase in the household energy cap is concentrating minds on the cost of gas. But it’s also raising questions about how best to accelerate the green energy transition. After all if we had reliable sources of renewable energy we could avoid leaps in inflation and move more quickly to net zero.
Europe has been talking about developing renewable energy sources for decades and it has also been taking some action. The European Energy Association estimates that the EU’s net emissions fell by 34% between 1990 and 2020.
But to reach the target of a 55% in net emissions by 2030, Europe will need cut energy consumption considerably faster. Net zero will be even more challenging.
The UK, of course, is in the same position and needs to encourage industry to invest in the green energy transition.
How much does climate change cost?
The UN’s Intergovernmental Panel on Climate Change (IPCC) estimates around 2.5% of world GDP should be invested in energy systems annually, from now until 2035. This is to limit global warming to 1.5 degrees centigrade above pre-industrial levels and comes to about US$2.4trn each year.
That’s likely not to be enough.
Marcel Haag is Director, DG FISMA B at the European Commission. Speaking at February’s ESG & Climate Regulation in Financial Services Conference, he said that level of investment is “well beyond the capacity of the public sector”.
The public sector will need to do a lot but financial regulators are moving quickly to ensure that financial services firms do too.
Chris Faint is Head of Climate at the Bank of England. At the same conference, he said, “Whilst in the past, as a regulator and supervisor, we would have investigated what best practice looks like before regulation… climate is different.”
As recent research shows, “Whereas the policy debate largely focuses on the impacts beyond the 1.5 degrees and 2 degree centigrade thresholds, near-term impacts at lower warming levels can be substantial and have persistent consequences beyond their immediate effect”.
How climate change regulation could impact firms
Even if the UK regulator is aiming for a least-total-cost approach that minimises the damage already being done, individual financial firms are unlikely to welcome new regulation. Each will consider their own balance sheet in competitive isolation.
Faint stressed that the Bank is focused on the right outcomes and on “not going too far with standards”.
“Regulation helps to drive improvement in firms… They will almost always do it quicker with regulation and in a more harmonised way.”
But “not going too far with standards” shouldn’t suggest that the Bank of England will soft-pedal the need for financial services to tackle climate change.
“The next stage of work… asks firms to tackle climate risks and not just understand what they are,” said Faint. He also said that the Bank won’t bow to pressure to put lower capital risk weightings on green activities.
See our Centre for Sustainable Finance