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The Bank of England should stay in its “swim lane” when tackling the financial risks of climate change and not interfere in the UK’s political debate around net zero carbon emissions, a senior official at the central bank has said.
Sarah Breeden, BoE deputy governor for financial stability, said on Thursday that the central bank had set high expectations for City of London firms on managing climate risk, and had helped equip them with the tools to do so.
“But it’s also really important for us to stay in our swim lane,” Breeden told a Financial Times summit. “The pathway to net zero is one for elected politicians to choose. What we need to do is to make sure that banks, insurers, the financial system, are ready to manage the risks, whatever that pathway is.”
How far central banks should intervene to minimise climate risks to the financial system is a subject of fierce debate among economists and policymakers.
It has become a topic of particular contention since President Donald Trump returned to the White House, with the US Federal Reserve recently withdrawing from the Network for Greening the Financial System, which coordinates policy on the issue.
Top officials at US financial watchdogs have also called on the Basel Committee on Banking Supervision, the standard-setter for global financial regulation, to downgrade a flagship project to tackle climate change risks.
In the UK, the BoE’s Prudential Regulation Authority is independent, while being accountable to parliament and deriving its remit from government instructions.
The UK has a legally binding target to hit net zero carbon emissions by mid-century and ministers have laid out how achieving this goal could lead to job creation and lower bills.
But Conservative leader Kemi Badenoch argued in March that the timeframe for hitting net zero was “impossible”. Richard Tice, deputy leader of Reform UK, has said the rightwing populist party would abandon the idea of net zero altogether.
The PRA last month told banks and insurers to carry out internal reviews on climate risk, warning that no British lenders were able to fully quantify how climate change would affect their activities in different scenarios.
The regulator also updated its guidance on how to assess risks that include physical harm, such as flooding, as well as complications arising from the economic transition away from the most polluting forms of energy.
Breeden highlighted the role that UK and European insurers and reinsurers could play in making sure these risks were priced in to insurance contracts.
“It’s clear that climate change has implications for financial institutions” and “potentially the [financial] system as a whole”, she said.
