LONDON (Reuters) - Britain’s first stress test of the response of banks to climate change will help the Bank of England determine if polluting assets should face “penalty” capital charges.
Its governor Mark Carney has told parliament’s Treasury Select Committee that the central bank is examining the case for a “brown penalising factor”, effectively a tougher capital requirement for polluting assets held on a bank’s books.
Carney said in a letter to the TSC published on Tuesday that there are impediments, including no common definition of “brown” and the possibility of activities moving to “green” over time.
“The adoption of a brown penalising factor is also hampered by the absence of data that allows us to measure the riskiness of an asset,” Carney said in the letter.
The Bank will conduct its first climate change related stress tests of Britain’s leading banks in 2021 and Carney said this will provide additional data on the links between climate risks and write-downs for different types of assets.
He was responding to TSC Chair Mel Stride who had asked the BoE whether it was developing any proposals that would force banks and insurers to hold extra capital against assets that are particularly exposed to climate risk.
Carney has said that climate change could make financial assets worthless in some cases.
Separately, Stride had also asked Andrew Bailey, chief executive of the Financial Conduct Authority, whether regulators could implement a system that rates financial products according to how sustainable or climate friendly they are.
Bailey, who becomes BoE governor on March 16, said the FCA is analysing how financial firms design and inform retail customers about products they say are climate friendly.
The work includes considering whether additional actions, guidance or rules are necessary to achieve this, with initial findings and next steps due over the summer, Bailey said.
“The FCA has powers available which could allow us to introduce rules on regulated financial services firms to disclose a ‘simple, comparable and consumer-friendly’ environmental carbon footprint visual rating system, if appropriate,” Bailey said.
Stride said action is needed to help consumers navigate the market and labels to clearly signal sustainability of a product may be a good start.
Reporting by Huw Jones; Editing by Alexander Smith