Bank of England moves closer to climate capital rules

In its Climate Change Adaptation Report, the PRA said that there is scope to use the existing capital regime to address the “financial consequences” of climate change, and that it will “be prepared to impose an additional capital charge or scalar where appropriate” for particularly exposed firms.

It also acknowledged the specific challenges of managing climate-related risks, which involve high levels of uncertainty, and said that it would consult on whether new approaches are needed in 2022.

The PRA’s statement appears to be a change of course for the Bank of England, which appeared to rule out changes to capital requirements when announcing climate stress tests in June.

David Barmessaid, senior economist at Positive Money, said: “Higher capital charges for unsustainable investments would help secure financial stability and stem the vast amounts of money being poured into a carbon bubble. Considering the huge work that needs to be done to align finance with governments’ climate commitments in such a narrow timeframe, such reforms are long overdue and policymakers should move to implement them without delay.

“After months of pushing back on the idea of ensuring capital rules reflect climate risk, believing that banks can be left to themselves to address this systemic issue, it is positive that the Bank of England appears to be recognising the need for stronger regulation.

“The Bank has finally accepted that climate-related risks are different to other financial risks because they involve huge amounts of uncertainty, tipping points, and long time horizons, meaning traditional risk measurement tools and existing capital buffers may be ill equipped to deal with the severe threats they pose.”