Wednesday, November 30, 2022
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Breaking the climate finance doom cycle

Our open letter to the Bank of England calls on them to act to prevent climate collapse

In the absence of strong regulation, the financial sector continues to fuel the climate crisis by providing loans and insurance to harmful fossil fuel projects that not only threaten our planet, but expose the economy and the financial sector itself to the consequences of environmental collapse. growing risk.

This climate and capital So this week’s meeting organised by the Bank of England and the Prudential Regulation Authority (PRA) to explore the role of financial regulation in addressing these risks comes at a critical time. ,

To drive decisive action by our financial regulators, we have prepared a open envelope To Governor Andrew Bailey and PRA CEO Sam Woods endorsed by leading thinkers and academics calling for disruption of the financial climate ​​​doom cycle’ where financial activity continues to fuel the climate crisis, which in turn increases risks to the financial system itself

The climate crisis poses a serious and growing threat to the financial system and macroeconomic stability in two ways:

  • physical riskdue to the increasing frequency and severity of severe weather events and environmental damage, which will hit the economy and cause economic losses
  • transition risk, As the UK and other economies transition to net zero emissions, the value of fossil fuel assets will gradually decline (to zero) and eventually become ​​​stranded’

The Bank plays an important role in supporting governments to mitigate these risks. When a bank or insurance company makes a loan, they must keep a certain amount of money on their balance sheet to cover any potential losses.these are called ​​​capital requirements” and the Bank of England should adjust these to make it more expensive to finance climate-risk activities.

We call on the Bank to take strong Prevention methodto take the necessary steps ahead of time before the worst impacts of climate collapse become reality:

  • Introduce higher risk weights to any asset associated with the production of new fossil fuels ​​​one-on-one’ The rules state that every pound of financing for such activities must be matched with a pound of the lender’s own funds.
  • Adjusting risk weights for existing fossil fuel assets progressive stage appropriately reflect its higher risk of loss of value

Responsible and forward-looking regulation can disrupt the financial climate by increasing capital requirements for climate-crippling financial activities, particularly lending and insurance for new fossil fuel projects ​​​A “doomsday cycle” in which financial activity continues to fuel the climate crisis, which in turn increases risks to the financial system itself.

Basic (minimum) capital requirements are determined by the internationally recognized Basel framework. The Bank of England, which has long been one of the thought leaders in considering climate-related risks, should now take the lead by adjusting its capital framework accordingly, and use its important voice in international standard-setting bodies such as the Basel Committee to drive solutions at the global level. International rules on climate-related financial stability risks.

read open envelope.

Image: iStock/​Dark_​Eni

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