The Bank of England (BoE) has reportedly stated that banks and insurers in the UK will face a 10-15% hit in their annual profits as well as higher capital requirements if they fail to address the climate crisis as a first-order issue.
In the bank’s first comprehensive stress test of how the country’s financial system will tackle the climate crisis and transition to a net zero-carbon economy by 2050, it warned that future costs will only be reduced by acting now.
Sam Woods, Deputy Governor, BoE, in a speech, claimed that the first major lesson from this exercise is that climate risks will become a drag on the profitability of insurers and banks, especially if they cannot effectively manage them.
Woods specified that while they may be different across companies and scenarios, the total loss rate will be equivalent to an average of around 10-15% drag on their annual profits.
The first central bank to undertake such a climate stress test of banks and insurers was the Bank of France, while the European Central Bank plans to do so this year.
Banks across the globe are facing growing pressure from climate activists to stop financing fossil fuel projects.
However, Woods said that insurers and banks will need to continue financing the economy’s more carbon-intensive sectors to assist the shift to a low carbon future.
Woods added that if financing to these businesses is cut off immediately, it may prove counterproductive and lead to numerous macroeconomic as well as societal consequences, such as elevated energy prices similar to their current situation.
Banks that are being tested for early, late, and no additional action to climate change include Lloyds, HSBC, NatWest, Aviva, and the insurance market of Lloyd's of London.
In the most severe scenario, banks and insurers will be facing an overall loss of £334 billion ($417 billion) over the next 30 years if they do not take any additional measures to lessen the rise in global temperatures.
The bank added that due to the test’s experimental nature, there is no pass or fail mark and the outcome will not be determining capital requirements.