Mark Carney presents the following analysis of the transition in thinking and action of banks:
“Consistent with the tragedy of the horizon, the risks posed to banks from climate change have tended to be beyond their planning horizons. A recent survey by the PRA of banks accounting for around 90% of the UK banking system, found that these horizons averaged four years – before physical and litigation risks would be expected to manifest, and prior to stringent climate policies likely taking effect.
There are signs, however, that banks are beginning to treat climate-related risks like other financial risks. The PRA survey finds that a majority of banks now see them as financial risks – rather than just a reputational or corporate social responsibility issues. As such, oversight of climate-related risks and overall responsibility for setting the climate risk strategy, targets and risk appetite has been elevated to Board level.
Banks have begun considering the most immediate physical risks relevant to their business models – from the exposure of mortgage books to flood risk or, for globally active banks, the impact of extreme weather events on country risk. And they have begun to assess exposures to transition risks where government policy is already pulling forward the adjustment. This includes exposures to carbon-intensive sectors, consumer loans secured on diesel vehicles and buy-to-let lending given new efficiency requirements.
But many banks have indicated that there is some way to go to identify and measure climaterelated risks more comprehensively, including given the need to improve data and expertise. This includes developing their approaches to stress testing for climate-risks as well as, over longer horizons, more dynamic scenario analysis. It is clear, however, that the TCFD framework is helping, including to identify metrics and promote use of climate-related scenario analysis.”