Bank of England (BoE) Governor Andrew Bailey has hinted that UK companies may soon be made to disclose carbon emissions data as part of the country’s push to reach net zero by 2050.
Speaking yesterday at the United Nations (UN) Climate Change Conference, COP26, Bailey said that while he recognises that such changes may be unwelcome for UK businesses, they are nonetheless necessary along the road to net zero.
“We must use the power of disclosure for companies to incentivise change over an acceptable timeframe,” said Bailey.
“I know that message is not always popular, but it is realistic, and it will lead us to the goal that we must achieve.
“It doesn’t have the message of stopping investment, but rather incentivising it to change in its impact,” he added.
Bailey appeared at COP26 as a guest speaker, where he delivered a speech entitled: ‘Laying the Foundations for a Net Zero Financial System’.
In addition to more powers of disclosure, Bailey mentioned two other areas that the BoE sees as priority for the UK as its economy transitions to net zero.
The first of these is making sure that the transition does not cause excessive disruption to energy supplies and energy prices, which have surged in 2021 due to rising inflation and the COVID-19 pandemic.
“In terms of its economic effects, we are already beginning to see the impact of climate change,” said Bailey.
“An example of this is energy prices – we must be able to manage the resilience and thus economic effects of the transition as we reduce the use of hydrocarbons but still rely on them.”
Secondly, Bailey said supply chain disruption must be front of mind when introducing new policies and benchmarks for reducing carbon emissions.
Again, Bailey said failure to heed this concern could result in the transition to net zero backfiring in economic terms.
“We must ensure that the supply chains which will support the renewable economies of the future are robust, otherwise we will compromise the change we must achieve,” he said.
Six years in the making
Elsewhere in his speech, Bailey spoke of the BoE’s journey to making climate change one of its top priorities.
Having been focused on climate change since 2015, Bailey said the bank’s climate change priorities have evolved significantly since then, and so have the “scale” of its future ambitions.
Mapping out a series of three “pivot points” that have informed the BoE’s investment strategy with regard to climate change, Bailey said the first catalyst came from what he calls the “microprudential”, working with the BoE’s Prudential Regulation Authority (PRA).
“In particular, since the PRA set its climate-related supervisory expectations in 2019, we have seen a step change among senior executives and boards at firms,” he said.
“Some firms are exhibiting genuine ambition in how they embed climate-related financial risks, demonstrating what can be achieved and highlighting where other firms could, and should, do more.”
In addition, Bailey said the BoE has been enabling firms to decarbonise through the Climate Financial Risk Forum (CFRF), a group of industry representatives chaired jointly by the BoE and the UK Financial Conduct Authority (FCA).
In March 2019 The CFRF published its second set of practical guides for businesses, with an emphasis on aiding smaller firms that may not have access to the resources and expertise needed to decarbonise.
The BoE is also working with the G7 on carbon disclosure, and with the Basel Committee (BCBS) and the Network for Greening the Financial System (NGFS) on supervisory expectations.
In concert with its international partners, Bailey said the BoE will be “shifting gears” in its domestic supervisory approach going into 2022, in order to ensure that firms are identifying and addressing climate-related financial risks.
“Rather than focusing solely on enabling, we will through active supervision be focusing also on ensuring our supervisory expectations on climate are met,” he said.
“Where progress is insufficient, and assurance or remediation is needed, the PRA will request clear plans, and, where appropriate, consider the exercise of its powers and use of its wider supervisory toolkit.”
A key part of this “toolkit”, which is outlined in the PRA’s 2021 Climate Adaptation Report, are regulatory capital requirements.
According to Bailey, these capital requirements will help ensure that firms have sufficient resources to absorb future financial losses due to climate-related risk.
“This supports their safety and soundness and contributes to the stability of the financial system as a whole,” he said.
“We already expect firms to hold capital against material climate-related financial risks, and our existing toolkit enables us to take action.”
Bailey said the BoE also recognises that capital may have an even bigger role to play.
And for that reason, last week it published a report that sets out its thinking on capital and what further work is needed over 2022 to determine if further changes to the regulatory capital framework are necessary.
“Let me be clear: regulatory capital can and should provide resilience against the consequences of climate change, namely financial risks,” he said.
“But it is not the right tool to address its causes. Addressing the causes driving the transition is for climate policy, and is rightly the responsibility of governments.”