The Bank of England does not have enough evidence to order banks and insurers to hold more capital to cover risks from climate change, the central bank's Deputy Governor Sam Woods said on Thursday.
While Mr Woods said the bank was exploring the extent it should reflect climate risks and capital requirement, it currently does not have the proof that certain products, such as mortgages, should carry a higher risk weight because of their climate risk.
“We just don't have that,” Mr Woods told delegates attending a Climate Action Week event hosted by the Bankers for Net Zero initiative.
“The evidence at the moment is a bit more macro,” he said, and looks at “the way climate is going to affect economies and sectors, and how might that feed through”.
The Glasgow Financial Alliance for Net Zero, formed in April, has 43 founding members including banks such as Barclays, HSBC and Lloyds, which have all pledged to reach net-zero emissions across their businesses by 2050 and to publish details of how they will achieve this between 2022 and 2030.
With the UN’s special envoy on climate action Mark Carney urging more international lenders to join the Alliance ahead of Cop26, the regulatory system is also under scrutiny to ensure it will support, rather than hinder, the financial sector’s bid to achieve its net-zero ambitions.
Mr Woods said that over time he expects the price banks charge polluting industries for loans will go up to reflect the risks from climate change.
"When we look around today we can try and find evidence of those risks being factored into prices ... we can't see much.”
He said climate activists may “quite rightly” question why the central bank is not enforcing this policy yet, but stressed that it should not do that until the bank has the evidence.
Mr Woods, whose second term as deputy governor of the Bank of England and as chief executive of the Prudential Regulation Authority started last month, said the bank has a number of green objectives.
These include improving the understanding of climate-related financial risks right across the financial system and the wider economy, developing and embedding climate risk financial management within the companies that it regulates and seeking to achieve best practice in its own right as an institution.
Mr Woods made it clear that the bank’s role was to assist with the transition of the financial services sector to net zero, rather than to dictate policy.
When asked whether the bank will commit to blacklisting fossil fuel companies from its corporate bond purchase scheme, Mr Woods said the answer was “no”.
Instead he said the bank will take “a nuanced approach”, which may “prove unsatisfying" to those that think the regulator should go further.
“We’re going to look at how can we move the weighted average carbon intensity of our portfolio through time … what targets we want to set for that, what requirements do we want to set for firms within our portfolio in terms of what we expect them to do, but not least in terms of what we expect them to disclose,” said Mr Woods.
He then said the bank would “tilt through time” more in favour of those firms who are making progress.
“All of that is a very different approach from the approach that just says, OK, these firms are bad for the climate, we boot them out, and these other firms are good and we keep them.”
Mr Woods said this stance is key because buying bonds is a tool of monetary policy, so it is not only about pushing climate change along.
The other reason for this approach, he said, is because the BoE "does not believe philosophically that that's the right way to go".
“We want firms across markets to improve and we want there to be pressure on them to do that", he said. “We think a better way to do that is to put incentives in place which require firms, even those in carbon-intensive industries to become less carbon intensive, rather than just chuck them out.”
The BoE doubled its bond purchase target to £895 billion ($1.24bn) in November last year to help bolster the UK economy against its biggest recession in 300 years, after the country almost completely shut down at the start of the pandemic last year.
At the time, BoE governor Andrew Bailey said the UK has not abandoned its commitment to climate change despite the “stark decisions” it was forced to make to tackle the Covid-19 crisis.
Mr Bailey said the regulator decided to prioritise people’s jobs, livelihoods and businesses at the start of the crisis, and these short-term interventions did not “discriminate on the basis of climate change”.
Environmental groups have criticised the BoE for including bonds issued by energy companies and other businesses with significant greenhouse gas emissions in asset purchase programmes designed to support the economy.
When asked if the bank should use the powers it has to discourage companies from fossil fuel exploration and exploitation by raising the cost of capital, Mr Woods said it would be "overreach" for the bank to adopt this stance.
“I think it's a decision for our elected officials as to what to do in that kind of a space, I don't think the central bank should say, OK we've decided that we need to worry about climate and therefore, we're going to somehow directly use our powers to penalise the flow of finance towards carbon-heavy Industries", he said.
“What we can do … together with politicians .. is say to the firms that we regulate, that first of all, you need to have an understanding of what your exposures look like in this respect and … how could that affect you. In light of that, how can you demonstrate to us that you are appropriately capitalised for those risks, and that you're on top of that? I think that is appropriate."