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UK banks may be holding too little capital for climate risks, investors tell BoE

Published 01/02/2024, 15:36
Updated 01/02/2024, 15:40
© Reuters. FILE PHOTO: A view of the financial district in London, Britain. September 23, 2023. REUTERS/Matthew Childs/File Photo

By Simon Jessop and Huw Jones

LONDON (Reuters) - Britain's banks may be holding too little capital to withstand the impact of climate change on their business due to inadequate disclosures of risks, a letter to the Bank of England from investors seen by Reuters showed.

The group, which includes leading UK and European pension schemes including Denmark's AP Pension and PKA and other institutional investors including Sarasin & Partners and Jupiter Asset Management, flagged a range of concerns to BoE Deputy Governors Sam Woods and Sarah Breeden in their Jan. 29 letter.

The investors want the Bank, which regulates how much capital lenders like HSBC (LON:HSBA), Lloyds (LON:LLOY), Barclays (LON:BARC) and NatWest (LON:NWG) must hold, to require the banks to disclose more and better information about the impact of climate change.

Banks are required to make basic disclosures under the so-called Pillar 3 section of global bank capital standards from the international Basel Committee, whose membership includes the BoE and prudential regulators from G20 economies and elsewhere.

Climate modelling was also understating the physical risks of worsening weather such as floods and wildfires, while the pace of technological change meant so-called 'transition' risks were also underestimated, the letter said.

Progress towards "enhanced capital requirements" to protect against climate risks is slow, it added.

The BoE declined to comment on the letter.

The BoE, like other central banks, tested banks on how they could cope with climate-related risks in 2022, but unlike with its annual stress tests, the outcome did not impact capital levels and also lacked bank-by-bank results.

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The Basel Committee has also been cautious, opting for a "holistic approach" that included a public consultation last November on improving Pillar 3 disclosures from January 2026, before considering any bespoke capital buffers for climate.

To help give investors more certainty over the risk management, the group suggested the regulator give explicit guidance to banks to use "severe but plausible" scenarios, including those around cascading climactic tipping points.

Banks should also be told to disclose the key conclusions of regulatory climate stress-testing, including on capital adequacy in more severe climate scenarios; and auditing and accounting of bank statements on climate should face "proactive enforcement".

"We believe that the actions outlined above would equip investors to enhance system-wide resilience by enabling more effective market discipline," the investor letter said.

Acknowledging that climate risks are global, the group said they would also write to prudential regulators in other jurisdictions.

Climate-related information should improve over time as Britain introduces tougher disclosure rules based on new international norms for listed companies, mirroring moves by the European Union, with the disclosures checked by external auditors.

Other investors to sign the letter included Edentree Investment Management, Degroof Petercam Asset Management, Robeco, Ethos Foundation, KBI Global Investors, Local Authority Pension Fund Forum and Carnegie UK.

Latest comments

What utter bollox!!!
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