The global financial system faces an existential threat from climate change and must take urgent steps to reform, the governors of the Bank of England and France’s central bank have warned.
They said: “As financial policymakers and prudential supervisors we cannot ignore the obvious physical risks before our eyes. Climate change is a global problem, which requires global solutions, in which the whole financial sector has a central role to play.”
The warning comes as concern over the impact of climate change and the lack of urgent action is increasing, reflected in the Extinction Rebellion protests and schoolchildren’s strikes across the world.
The heads of two of the world’s most influential central banks urged other financial regulators around the world to carry out climate change stress tests to spot any risks in the system, while also calling for more collaboration between nations on the issue. They warned that a “massive reallocation of capital” was necessary to prevent global warming above the 2°C maximum target set by the Paris climate agreement, with the banking system required to play a pivotal role.
Climate change poses significant risks to banks and insurers from rising instances of catastrophic weather-related events, such as heatwaves, droughts and floods, which could land them with significant losses.
There are also risks for financial firms as governments accept the need to tackle climate change because banks that have lent to companies reliant on burning fossil fuels run the risk of steep financial losses.
Banks could find they have stranded assets that turn out to be worthless if they are reliant on burning fossil fuels. Threadneedle Street has said as much as $20tn (£15.3tn) of assets could be wiped out by climate change if it is not effectively addressed.
The open letter from Carney and De Galhau accompanies the launch of a report from the Network for Greening the Financial System (NGFS), an international group of central banks and financial regulators, outlining the steps necessary for financiers to tackle climate change.