Climate change

Climate change creates financial risks and economic consequences. These risks and consequences matter for our mission to maintain monetary and financial stability.

Our response to climate change

We have made a 10-part pledge to advance the climate agenda across our strategic priorities:

Climate change, the economy and financial system

Climate change affects our planet, our economy and our financial system. This is why climate change is relevant to the Bank of England’s central mission to promote the good of the people of the United Kingdom by maintaining monetary and financial stability.

The rise in human activity – and the subsequent carbon and other greenhouse gas (GHG) emissions – experienced since the industrial revolution has already had a considerable and measurable impact on our planet’s climate. Scientists estimate that global temperatures have risen by around 1°C since 1850, and could exceed 4°C by the end of this century if no action to limit emissions is taken.

For this reason, over 190 countries signed up to the Paris Agreement in 2015, which set out a global framework for combating climate change. The Paris Agreement's primary goal is to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels. Over recent years, more than 130 countries have announced their ambitions to reduce emissions to net zero, with many, including the UK, setting legally binding targets.

Achieving these targets will require large-scale reductions in GHG emissions globally – and estimates by bodies such as the Intergovernmental Panel on Climate Change (IPCC) suggest that countries must have by 2050 to achieve this. The transition to net-zero emissions would affect all countries and sectors, and would involve unprecedented structural change to the global economy.

The risks from the physical effects of climate change and the transition to a net-zero economy are relevant to our mission to maintain monetary and financial stability. In particular, these risks pose a threat to the stability of the wider financial system, and the safety and soundness of firms we regulate.

The Bank’s climate work is spearheaded by two Executive Sponsors - Sarah Breeden (Executive Director for Financial Stability Strategy and Risk), who covers the Bank’s policy functions, and Ben Stimson (Chief Operating Officer), who covers the Bank’s physical operations. Read speeches by members of our senior team to find out more about our response to climate change.

Latest updates

23 June 2022: The Climate Financial Risk Forum (CFRF) published a beta version of their online climate scenario analysis narrative tool to support smaller firms. The Forum will update the tool to enhance content and reflect the latest NGFS scenarios in Q1 2023.

23 June 2022: We published our third annual climate-related financial disclosure, aligned with the framework and recommendations developed by the Financial Stability Board’s (FSB) Taskforce of Climate-Related Financial Disclosure (TCFD).

8 June 2022: Stefan Claus spoke about how prepared the UK’s largest insurers are for the financial risks caused by climate change. Although recent tests show an improvement to risk management, there is still more to do to bridge gaps in available climate data.

27 May 2022: The Climate Financial Risk Forum (CFRF) published the minutes from the first meeting of the CFRF’s third session. The Forum agreed to the Terms of Reference for Session 3 (revised to reflect the new Forum membership and technical working groups).

24th May 2022: We published the results from the second round of our Climate Biennial Exploratory Scenario (CBES). Sam Woods delivered a speech to discuss these. Our findings will feed into our work on supervisory expectations, and we will undertake some work to determine whether the capital framework needs to be updated.

UK financial regulation and supervision

Prudential supervision

The risks from the physical effects of climate change, as well as the transition to net zero, pose a threat to the stability of the wider financial system, and the safety and soundness of firms we regulate.

In April 2019, building on both our 2015 insurance report and 2018 banking report, we became the first central bank and supervisor to set supervisory expectations (Supervisory Statement 3/19) for banks and insurers on the management of climate-related financial risks, covering governance, risk management, scenario analysis and disclosure. This set out our expectations that firms take a strategic approach to managing climate-related financial risks, identifying current risks and those that can plausibly arise in the future, and appropriate actions to mitigate those risks. SS3/19 was published alongside Policy Statement 11/19, addressing the responses to Consultation Paper 23/18.

We followed this up with a ‘Dear CEO letter’ to firms in 2020. This letter set out more detailed guidance on how firms should embed their approaches to managing climate-related financial risks by the end of 2021. This letter built on the expectations set out in Supervisory Statement 3/19, and provided observations on good practice and set out next steps for implementation.

In October 2021, we published our second climate change adaptation report (CAR). The 2021 CAR set out the progress firms have made on managing climate-related risks, our supervisory strategy for 2022, and the potential role of capital requirements. As set out in the CAR, over 2022, we will undertake further analysis to explore whether enhancements to the regulatory capital frameworks are needed. Following this work, our aim is to publish a follow-up report to the 2021 CAR focused on the use of capital including the role of any future climate-scenario exercises.

From 2022 onwards, we have moved towards actively supervising regulated firms against our supervisory expectations. Addressing the risks from climate change is now a core component of our supervisory approach, and we expect firms to meet these and to make improvements where these are required.

Climate Financial Risk Forum

In March 2019, together with the Financial Conduct Authority (FCA), we established the Climate Financial Risk Forum (CFRF) to build capacity and share best practice across industry and financial regulators to advance our sector’s responses to the financial risks from climate change.

It brings together senior representatives from across the financial sector, including banks, insurers and asset managers. The forum has set up four working groups to produce practical guidance on four specific areas: risk management, scenario analysis, disclosure and innovation.

In June 2020, the CFRF published its guide to help the financial industry approach and address climate-related financial risks. In October 2021, the second round of guides were published to further help the financial sector develop best practices to manage climate-related financial risks and opportunities. These guides incorporate best practice and are written by industry, for industry. They build on the 2020 guide,  focussing on risk management, scenario analysis, disclosure, innovation and climate data and metrics.

The forum continues to build on these guides, by developing new materials that progress the management of climate-related financial risks.

In May 2022, the CFRF published the minutes from the first meeting of their third session. The Forum agreed to the Terms of Reference for Session 3 (revised to reflect the new Forum membership and technical working groups).

Climate-scenario analysis and stress testing

The financial risks posed by climate change are unprecedented, so building a toolkit to help manage and mitigate them is equally unprecedented. Climate-scenario analysis and stress testing is a key part of such a toolkit. It allows for the exploration of impacts and exposures at the level of the financial system under a range of potential climate pathways. For these reasons, we are using our stress testing framework to assess the impact of climate-related risks on the UK financial system.

In June 2021, we published the Key Elements document outlining the 2021 Biennial Exploratory Scenario on financial risks from climate change. The CBES exercise, published in May 2022, explored the resilience of the UK financial system to the financial risks associated with the physical impacts from climate change and the transition to net zero in the three scenarios; Early, Late and No Additional Action, which build on a subset of the scenarios published by the Network for Greening the Financial System (NGFS).

This is the first time we tested both banks and insurers allowing the Bank to capture interactions between them and understand the risk presented by climate change across the financial system.

The CBES built on our Insurance Stress Test for 2019, which included an exploratory exercise in relation to climate change. The set of climate scenarios explored the impacts to both firms' liabilities and investments stemming from physical and transition risks.

Research on climate change

The potential macroeconomic and financial stability implications of climate change and the transition to a net-zero economy are a key focus within our Agenda for Research.

As part of our work on climate change, we research key topics, participate in conferences and host workshops. To date, this has included:

February 2022: Launch of the call for research papers for the Climate and Capital conference to be held in October 2022.

October 2021: A joint research conference with Banca d'Italia on the macro-financial impacts of climate change and the net-zero transition.

April 2021: Staff Working Paper on climate policy and transition risk in the housing market.

November 2020: Bank Underground article on the Covid-19 crisis, climate change and green recovery.

March 2020: Staff Working Paper on the relationship between bank lending and severe weather events.

October 2018: Bank Underground article on the potential macroeconomic implications of a transition to a low-carbon economy.

October 2018: Bank Underground article on the relationship between mortgage arrears and property energy ratings.

May 2018: Joint article in Nature Climate Change on the climate change challenges for central banks and financial regulators.

January 2018: Staff Working Paper on climate change and the macro-economy.

November 2016: A joint conference with the Council on Economic Policies on 'Central banking, climate change and environmental sustainability’.

July 2016: A joint workshop with the Met Office on climate risk and financial stability.

May 2016: Staff Working Paper on the impact of climate change on central banks.

International engagement and initiatives

The financial and economic consequences of climate change are not solely domestic concerns. As such, we play an active role in supporting a co-ordinated international approach to climate change. For example, through our work with other central banks and financial supervisors, playing prominent roles in international fora (such as the G7 and G20), and by working with the Government to deliver on its COP26 agenda (held in November 2021). This year we look forward to engaging internationally through COP27, being hosted by Egypt.

We also engage in the climate-related workstreams of standard setters and international bodies. For example, we are contributors to the climate-related work of the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB).

Central Banks and Supervisors Network for Greening the Financial System (NGFS)

We are a founding member of the Central Banks and Supervisors Network for Greening the Financial System (NGFS) and sit on the steering committee. The NGFS was co-founded by eight central banks and supervisory authorities in December 2017, and its membership has grown to 100 members and 16 observers.

We have played a leading role in developing the NGFS’s understanding of the macroeconomic and financial risks arising from climate change, in part, through Sarah Breeden’s tenure as Chair of the NGFS workstream on Scenario Design and Analysis (WS2), which concluded in April 2022. The Bank continues to be an active member of the workstream on Scenario Design and Analysis.

In June 2021, the NGFS published its second vintage of the NGFS scenarios, along with a dedicated NGFS website, which were developed under WS2 with the aim of providing central banks and supervisors, as well as financial firms and companies, with a common starting point for analysing climate-related financial risks under different future climate pathways. To support implementation of these scenarios, WS2 also published a guide to climate scenario analysis for central banks and supervisors.

In October 2021, the NGFS published its ‘Scenarios in Action’ report on the application of NGFS climate scenarios by central banks and supervisors to date.

In May 2022, the Bank undertook the Chair of the NGFS workstream on Monetary Policy (WS3), focussing on understanding how climate change and climate policies should be considered in relation to the conduct of monetary policy. The Chair is held by James Talbot in the International Directorate. This was part of the wider NGFS update for their 2022-2024 work program. 

Through the NGFS, we aim share our own experience, learn from others, and promote consistent and effective responses to climate-related financial risks by central banks and supervisors across the world.

Sustainable Insurance Forum

We are also co-founders of the Sustainable Insurance Forum (SIF). SIF is a global network of insurance supervisors and regulators, who work together on sustainability challenges facing the insurance sector, including climate change.

In 2020, the SIF published a climate-related question bank for insurance supervisors and, alongside the International Association of Insurance Supervisors (IAIS), published a landmark application paper on the supervision of climate risks in the insurance sector. Anna Sweeney, our Executive Director of Insurance Supervision, is the chair of the SIF and Vicky Saporta, our Executive Director of Prudential Policy, is chair of the IAIS.

Supporting enhanced climate disclosure

To allow markets to better assess, price and manage climate-related financial risks, the Financial Stability Board (FSB), at the request of G20 leaders, established the industry-led Task Force on Climate-related Financial Disclosures (TCFD) in 2015.

The TCFD’s framework is increasingly becoming the global standard for climate disclosures. We use this framework for our own annual climate-related financial disclosure, which was first published as part of our annual reporting for the financial year 2019/20, and sets out our approach to managing climate-related financial risks.

We are an official supporter of the TCFD recommendations. In November 2020, we, alongside others in the joint UK Government-Regulator TCFD Taskforce, set out a roadmap towards mandatory TCFD-aligned climate disclosures across the UK economy by 2025.

In October 2021, the UK Government set out more information on their proposed Sustainability Disclosure Requirements (SDR) in their Sustainable Finance Roadmap. The SDR will provide an economy-wide framework to support the greening of the UK financial system and alignment with the UK’s net-zero commitment. It will cover UK corporates, investment products and investment portfolios, and will streamline the UK’s existing disclosure requirements (eg mandatory TCFD-aligned climate disclosures) with new requirements.

At an international level, the Bank supports the International Sustainability Standards Board’s (ISSB) work to develop a global climate reporting standard. When the IFRS Foundation first consulted on establishing a Sustainability Standards Board in November 2020, the Bank publicly supported the proposals and recommended that future global sustainability standards should build on the TCFD framework and recommendations to promote global consistency. We continue to actively engage with the ISSB to support their work on climate disclosure.

Supporting increased technical co-operation and assistance

We support the work of other central banks and financial regulators on climate change, in part through our Centre for Central Banking Studies (CCBS).

For decades, we have provided international central banking technical co-operation and assistance to equip central bankers and financial regulators with the skills and knowledge they need to tackle the challenges they face. In recent years, this has included assistance on climate change.

In partnership with the UK’s Foreign, Commonwealth and Development Office (FCDO), we are hosting a series of workshops on climate change in 2021 and 2022. These are aimed at central bankers and financial regulators who handle climate related issues in their institutions. In September 2021, we held a global workshop on climate-scenario analysis and stress testing, with over 330 central bankers and supervisors spanning 65 countries in attendance. Find out more about our workshop programme.

We support the Central Banks’ and Supervisors’ Climate Training Alliance (CTA), established by the Bank for International Settlements (BIS), International Association of Insurance Supervisors (IAIS), NGFS and SIF. The CTA aims to support technical cooperation and assistance on climate-related financial risks among central banks and financial supervisors.

Our own disclosure and operations

Our climate-related financial disclosure

We recognise the importance of climate-related financial disclosures in providing transparency over the measurement, management and mitigation of climate-related financial risks across the economy. 

As a public institution, it is also important that we provide this same level of transparency across our own policy functions, financial operations, and physical operations. Consequently, since June 2020 we have published our own annual climate-related financial disclosure, aligned with the framework and recommendations developed by the Financial Stability Board’s (FSB) Taskforce of Climate-Related Financial Disclosure (TCFD).

The progress we made in our climate-related work over 2021 as described in our 2021/22 climate-related financial disclosure is summarised below.

In 2021 we...

  • Made significant progress on our climate strategy
  • Reduced emissions from our physical operations by 11% and began developing a net-zero transition plan to launch in 2023
  • Undertook enhanced analysis of our financed emissions
  • Advanced our understanding of how climate change affects the economy and financial systems
  • Supported international climate work in regulatory groups and the UK's presidency of the G7 and hosting of COP26

Financial operations

In March 2020, Governor Andrew Bailey outlined our intention to assess ways that our holdings of corporate bonds could be adjusted to take the climate impact of issuers into account while still meeting our monetary policy objectives.

Following a change to the Monetary Policy Committee (MPC) remit in May 2021, we set out in a Discussion Paper in May 2021 our proposals for ‘greening’ our Corporate Bond Purchase Scheme (CBPS). Andrew Hauser, our Executive Director for Markets, set out the proposed approach of this Discussion Paper in It’s not easy being green – but that shouldn’t stop us: how central banks can use their monetary policy portfolios to support orderly transition to net zero.

The purpose of this Discussion Paper was to seek feedback on the principles that might guide how best to incentivise transition to net zero via the CBPS; and the tools we might use to do it. It highlighted some of the key challenges and design choices and set out questions on which we gathered feedback.

In November 2021, we set out our approach to greening the CBPS. This followed the publication of a CBPS Discussion Paper, and subsequent engagement with a wide range of stakeholders including net zero investment experts, asset managers, climate groups and the wider public. The approach, published alongside a Market Notice, implements the principles set out in the Discussion Paper. Adjustments to the CBPS would commence from November 2021.

In February 2022, the MPC announced that it would reduce the stock of sterling corporate bonds through a programme of bond sales, winding down the entire portfolio, to be completed no earlier than towards the end of 2023 or in early 2024, subject to market conditions. As described in the Market Notice which followed on 5 May 2022, in making these sales, the Bank will have regard to the ongoing diversification of the portfolio, including greening. While the corporate holdings are to be unwound, the Bank’s framework, on which the subsequent reinvestments were based, supports climate transition by providing an example for other investors in the public and private sectors of how to green a corporate bond portfolio.

Physical operations

We are committed to running our own physical operations responsibly and sustainably.

In 2020, we set a target of reducing our absolute greenhouse gas emissions by 63% from 2016 to 2030, covering our Scope 1 emissions (use of natural gas, fuel and refrigerants), Scope 2 emissions (electricity) and travel emissions included within Scope 3 emissions. This level of reduction is consistent with aligning emissions from our physical operations to the goals of the Paris Agreement.

We remain on track to meet our 2030 carbon target, but recognise we need to go further. In June 2021, we committed to target net-zero greenhouse gas emissions from our physical operations more broadly by 2050 at the latest. In June 2022, we also committed to publish our transition plan for reaching this net-zero goal for our physical operations.

Our Greener Bank programme aims to reduce the environmental impact of our day-to-day operations.

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This page was last updated 27 June 2022
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