On 18 April 2023, the Bank of England (BoE) published a speech by its Executive Director for Financial Stability, Strategy and Risk, Sarah Breedon, given at Chapter Zero’s fourth anniversary dinner. The speech addresses climate action, looking at the collective progress to date in the transition to net zero.

Introduction

Ms Breedon reflects on a speech she gave in 2020, in which she identified three stages in the journey to making climate action a reality: recognising and identifying the financial risks climate change poses, building capabilities to enable aspiration to be turned into action, and making business decisions to advance the transition. In her latest speech, Ms Breedon evaluates progress, identifies barriers encountered and considers what else is needed in order to progress.

Progress made

Ms Breedon notes that she has seen a step-change in UK banks and insurers’ approaches to climate risks, making more serious investments in developing effective capabilities both to manage climate-related financial risks and to identify opportunities. She highlights that interaction with banks and insurers has revealed them to be in the early stages of developing their climate risk management capabilities. In order to address this, the BoE set the world’s first supervisory expectations for climate risks in 2019. The BoE‘s reviews and observations, including its first climate scenarios exercise, the CBES, have shown significant progress, but more work is needed and all firms need to invest to make further progress.

In 2020, the quantity and quality of climate disclosures was in its infancy, but the speech notes that mandatory disclosures for large corporates under the TCFD are now a reality in the UK, and are driving the right conversations around board tables. As such, Ms Breedon flags that the BoE is soon to publish its fourth TCFD-aligned report. Additionally, the ISSB is due to build on the work of the TCFD by publishing its first global standards on climate later this year.

Challenges to advancing the transition

Despite the progress mentioned, Ms Breedon goes on to describe the challenges to advancing the transition, which include:

• Filling capability gaps in the transition finance infrastructure, which will take time, so urgent steps need to be continuously taken. This requires the rapid implementation of ISSB standards, finalising the Transition Plan Taskforce’s framework for transition plans, and the adoption of innovations that reduce greenwashing such as product labels.

• The world does not stand still. The BoE has seen unexpected political and economic headwinds and it seems prudent to assume more will come, so Ms Breedon advocates that firms and regulators should be nimble and adaptable in their responses to near-term issues whilst continuing to make progress on the long-term.

• It is difficult, but essential, for real economy and financial firms to make transition-driven business decisions in the absence of complete clarity on the pathway to net zero. Ms Breedon warns that setting clear and comprehensive policy will take time, likely years. The recent Green Finance Strategy takes us forward in a significant way, but the extent of policymaking is formidable. Firms should not delay taking action to better understand how transition may affect their businesses.

• System wide change is complex as the actions of one are dependent on actions of others, so it is important to coordinate action throughout the supply chain. Each firm should be stretching its horizons, building capabilities now that enable action to drive long-term reductions in emissions through their value chain. Economy-wide emissions reductions will come through proactive engagement with counterparties and suppliers, and decisions aligned to the transition over time.

Ms Breedon concludes that we have not yet reached the ‘tipping point’ where we have the skills and tools that drive the right actions in an unavoidably uncertain transition, and that governments, business, finance and central banks all have unique roles to play to get us there.