UK banks and insurers will end up shouldering nearly £340bn worth of climate-related losses by 2050, unless action is taken to curb rising temperatures and sea levels, the Bank of England has warned.
The numbers emerged from the Bank’s first climate stress tests on seven of the UK’s largest lenders. These involved three climate scenarios over a 30-year period, covering physical and transition risks, including one in which governments fail to take further steps to curb greenhouse gas emissions, resulting in average temperature rises of 3.3C, and a 3.9-metre rise in sea levels.
The regulator found that without early action, companies would suffer a surge in loan and mortgage defaults, investment losses, and climate-related lawsuits – particularly for insurers – worth £334bn across the UK’s 19 largest banks and insurers by 2050.
“Climate change will inevitably drive losses for banks and insurers – even in a scenario where governments around the world take swift and early action to bring us to net zero,” Sam Woods, deputy governor for Prudential Regulation and chief executive officer of the Prudential Regulation Authority, said.
While banks are likely to survive the Bank of England’s worst case climate scenario, delayed transition efforts – in which governments and industry wait until 2031 to take action – banks alone would still suffer £110bn worth of collective losses.
That is roughly twice the rate of pre-Covid losses recorded by the seven lenders tested in the Bank of England’s climate stress tests: NatWest, Barclays, HSBC, Lloyds, Standard Chartered, the UK arm of Santander, and Nationwide building society.
“The first key lesson from this exercise is that over time, climate risks will become a persistent drag on banks’ and insurers’ profitability, particularly if they don’t manage them effectively,” Woods added. “While they vary across firms and scenarios, overall loss rates are equivalent to an average drag on annual profits of around 10-15%.”
While the regulator has been praised for the climate stress stests, the Bank of England has come under fire for so far refusing to publish data for individual firms, and stopping short of introducing immediate capital requirements, which would make it more expensive to offer loans and services to fossil fuel companies and carbon-intensive projects.
Threadneedle Street has, however, not ruled out releasing individual results in the future, or considering how they may impact capital requirements. The Bank plans to use the initial reports to inform how it supervises each company.
The Bank of England is one of the few central banks to have conducted climate stress tests, alongside the European Central Bank and Banque de France.