Andrew Bailey: Bank of England was right to prioritise Covid over climate change

Regulator's decision to put jobs and businesses first did not ‘discriminate on the basis of climate change’

Bank of England governor Andrew Bailey said the UK now aims to build a financial system that is resilient to the risks from climate change and is supportive to a net-zero economy. Reuters

Bank of England 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”.

“I believe that was the right response in the face of such an emergency and in all conscience it was not right to say to people that they would be denied a livelihood because their employment was of the wrong sort for the climate," Mr Bailey said at the three-day Green Horizon Summit in London.

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.

Mr Bailey said he made his point "very starkly, because there is no point hiding from reality".

“But that does not mean that we have abandoned our commitment to tackle climate change and indeed the UK government has made a firm commitment to transitioning the economy to net zero by 2050.”

The Green Horizon Summit, organised by Mr Bailey's predecessor, former BoE governor Mark Carney, set out a private finance strategy ahead of Cop 26, the UN climate summit which was due to run this month and has now been pushed back until November next year by the coronavirus pandemic.

Mr Carney, now a UN special envoy for climate action, called on banks, insurers and fund managers to invest in private sector initiatives and profit from "the greatest commercial opportunity of our time" to help companies transition to a net zero future.

In his address at the summit, he said that achieving net zero targets on greenhouse gases required “a whole economy transition, involving every company, bank, insurer and investors,” who can now profit from “changing consumer preferences and new climate policies.”

Mr Bailey pointed to the record wildfires in Australia and California, as well as record-breaking temperatures in the Arctic Circle, as reminders of the need for sustained effort to combat climate change from governments, public authorities and the private sector.

“It is important that, even in the face of that, even in the face of the resurgence of Covid and the necessary measures to tackle it, we plan for the future and act on these plans,” he said.y

Mr Bailey, who became BoE governor on March 15, pointed to the Bretton Woods Agreement of 1944, one of the most fundamental reforms of the international financial system, as a reminder that “our predecessors did not wait for the for the Second World War to end to determine what the future should look like, and thereby tackle problems that had beset the inter-war period".

Messages from that agreement include “not waiting for today’s problem to be over before setting the course for the future”, Mr Bailey, said with the accord laying the platform for a sustained recovery from a terrible crisis.

Mr Bailey said the UK now aims to build a financial system that is resilient to the risks from climate change and is supportive to a net-zero economy.

While Covid has been the bank’s first test of the reforms put in place by the central bank after the financial crisis, the difference with climate change, he said, is that “we now know that it is coming”.

“Compared to the financial crisis and the pandemic, the risks from climate change are even bigger and more complex to manage.”

The bank said it will unveil a climate stress test exercise in June next year, which will explore three different climate scenarios, testing different combinations of physical and transition risks over a 30-year period.

The test came after the Taskforce for Climate-related Financial Disclosure (TCFD) led the way in climate change disclosure metrics, which allow financial firms and their clients to measure, model and disclose the climate risks they are exposed to.

Last year, the BoE became the first central bank to set out supervisory expectations for banks and insurers on the management of climate risks. This year, the institution wrote to chief executives with more guidance, putting in place a deadline for firms to meet its expectations by the end of 2021.

“Of course, this is no easy task. That is why we have worked closely with industry through the Climate Financial Risk Forum (CFRF) to publish a practical guide for firms so that they can implement changes,” said Mr Bailey.

The bank’s new stress test will help UK bank and insurance businesses understand how they might be affected by climate change and how they might respond.

“We will not use the results to size firms’ capital buffers. But that does not mean firms should not be thinking about near-term capital requirements,” Mr Bailey said.

“As we have set out in our supervisory expectations, firms must assess how climate risks could impact their business and review whether additional capital needs to be held against this. Investments that look safe on a backward look may be existentially risky given climate risks. And investments that might have looked speculative in the past could look much safer in the context of a transition to net zero.”

Looking ahead, Mr Bailey said the financial system must also look to facilitate investment in the economy to support climate change.

“The level of investment in the UK economy as a whole has been weak for some time, and alongside this we have seen weak productivity growth. Covid has further hit investment, including the investment intentions of firms," he said.

“An important part of the recovery from Covid will be to stimulate and support investment, particularly if we do see some elements of structural change in the economy reflecting, for instance, the way we work. Investing to support the transition to zero net emissions will be a critical part of the recovery.”

Mr Bailey said this means capital markets will also need to play an important part in the transition to a resilient carbon-neutral economy.