In a step that has never been done before by any chief financial regulator, the Bank of England said it would require the country's banks to improve their financial strategy by including the long-term risks of climate change.
BOE, Britain's central bank which manages the global financial hubs located in London, said more banks should design their financial models with great emphasis on the monetary risks of unforeseen events that result from climate change. For example, when designing mortgage plans, banks should take into consideration whether properties are at risk of flooding; or when investing overseas, banks should asses the countries which could be gravely affected by extreme weather conditions.
Essentially, BOE has called for banks to take climate change as a corporate social responsibility. In line with this, BOE would require banks to designate executives from their board who will monitor the financial impacts of climate change. These executives shall be at the "line of fire," reporting to the board regarding new approaches, both in regulatory and analytical level, on how to mitigate the financial threats of global warming.
Moving forward, BOE said it is planning to set capital add-ons against companies that will not take the matter seriously.
BOE said there are banks that have promised investments on green initiatives or have reassessed lending to projects that pose environmental risks. However, it still wants banks to design strategies and models that are targeted to specific environmental calamities that could threaten financial portfolio.
The move came after a survey of from the U.K. banking sector conducted by BOE's Prudential Regulation Authority found that only 70 percent of the country's banks recognize that climate change poses financial risks.
The report published on Sept. 26 found that of the 70 percent, only 30 percent consider climate change as a corporate social responsibility and only a meager 10 percent has actually plan to devise long-term strategic view to addressing the risks.
While the majority of the U.K. banking sector, which represents more than $14 billion in assets, acknowledge the risks of climate change to their portfolios, BOE wants more banks to work on attaining the achievements of the 10 percent.
Meanwhile, a group of 18 central banks has disclosed that they are struggling with how to address the financial risks of global warming, the Financial Times reported. The central banks, which include Germany, France, Japan, and China, warned that the financial impacts of climate change have the tendency to be irreversible.
Separately on Oct. 8, a study released by the United Nations Intergovernmental Panel on Climate Change found that the Earth will reach the critical threshold climate change levels of 1.5 degrees Celsius or 2.7 degrees Fahrenheit by 2030. This means that when this threshold is reached, there will be eventual rapid risks of extreme drought, flooding, wildfires, and hunger around the world.
The report has called on the countries to delay reaching this threshold by implementing drastic changes to all aspects of society and industry, including humans' use of land, energy, and infrastructure.
