Sarah Breeden: Climate action - approaching a tipping point?
Speech by Ms Sarah Breeden, Executive Director for Financial Stability Strategy and
Risk of the Bank of England, at Chapter Zero's fourth anniversary dinner, hosted by the
Global Association of Risk Professionals, London, 18 April 2023.
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Firstly, thank you Chapter Zero and GARP for hosting me today, and for the opportunity
to reflect on our collective progress in the transition to net zero.
It is timely to do so. The latest IPCC synthesis reportOpens in a new window provides
yet another stark warning of the impact that climate change will have on our planet. We
are now a third of the way through the decisive decade; a decade where we will need to
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cut global emissions by over 40%, if we hope to limit warming to 1.5C. And yet global
CO2 emissions continue to rise.2
For us to meet this challenge, we need to collaborate and to take individual
responsibility for the role we each play.
For the Government, it is to set out the pathway to net zero. For each of you here today
- and the firms you represent - it is to apply those pathways in boardroom decisions;
decisions that will not only help facilitate an orderly transition, but also help ensure the
long-term relevance and value of the companies you lead. For the finance sector, it is to
support and enable that transition. And for the Bank of England, it is to work within its
objectives to ensure the financial system is resilient to the risks from climate change
and supportive of the transition to net zero.
With that in mind, today I wanted to reflect on a speech I delivered in 2020 on how to
move beyond rhetoric to make climate action a reality.
I had split our journey into three phases. Firstly, recognising and identifying the financial
risks climate changes poses. Secondly, building capabilities to enable us to turn
aspiration into action. And thirdly, making business decisions to advance the transition.
With almost three years passed, I want now to evaluate our progress, identify the
barriers we have encountered, and consider what else is needed if we are to progress.
Back in 2020, I suggested that we had probably achieved the first phase of our journey
to net zero. Conversations with leaders in the financial sector made it increasingly clear
that climate change is central to the future of their businesses, not just the confines of
Corporate Social Responsibility departments.
I suggested we had entered the difficult second phase of turning aspiration into action,
across the financial sector and the real economy. This phase involves a lot of hard
work: the collection of data and the building of new tools that better enable climate
considerations to be embedded in strategy and risk management.
And I finished with a hope that we were fast approaching the third and final phase -
with these tools actively used in financial and business decisions to progress an orderly
transition to net zero.
Since then, a global pandemic, a war and the fastest tightening in financial conditions in
thirty years have meant that things have not panned out as we might have expected.
Let's take stock of where that has left us.
Taking stock
My prism on this is as a central banker and regulator, where we have good sight of how
the UK's banks and insurers are building their approaches to climate risks. These firms
sit at the centre of the economy, and their responses matter.
I have seen a step-change in their approach. They are making more serious
investments in developing effective capabilities - both to manage climate-related
financial risks and to identify opportunities. But are they enough?
Let me explore this across four core dimensions: scenario analysis; firm risk
management capabilities; disclosure; and green finance.
Learning from scenario analysis
I'll start first with scenario analysis - an essential tool for understanding the size and
pathways of unprecedented and uncertain future climate risks.
The Bank has delivered its first climate scenarios exercise, the CBES . In my view this
was transformative, both in shining a light on otherwise opaque risks and in building
capabilities.
Importantly, the exercise required firms to understand how their real economy
customers were both exposed to these risks and the actions they would take to manage
them. This was one of the most challenging aspects of the work - as it revealed gaps in
real economy firms' understanding of what climate transition means for them. A gap I
will return to.
The CBES also showed that costs were lowest, and opportunities greatest, with an
early and well managed transition. That underlines that while governments set public
climate policy, banks and insurers have a collective interest in managing climate-related
financial risks in a way that supports that transition over time.
Managing climate related financial risks
Second, interactions with banks and insurers had revealed them to be in the early
stages of developing their climate risk management capabilities. To address this, we set
the world's first supervisory expectations for climate risks in 2019 - expectations that
became part of the PRA's core supervisory processes last year.
Our reviews and observations - including the CBES - have shown significant progress.
However, a distance remains to the end-point and all firms need to invest to make
further progress.
We have given firms a huge amount of homework to do, as set out in our latest Dear
CEOOpens in a new window letter and in direct supervisory feedback. I can assure you
we will be marking that homework.
Progress on climate related disclosures
Third, in 2020, the quantity and quality of climate disclosures was in its infancy. We had
recognised the need for it to move from the static to the strategic, for it to be
forwardlooking and for it to be comparable across firms.
Now, mandatory disclosures for large corporates under the TCFD are a reality in the
UK, and are driving the right conversations around board tables.
Here at the Bank we are soon to publish our fourth TCFD-aligned report, overcoming
challenges with each new report.
And internationally the ISSB is due to build on the work of the TCFD by publishing its
first global standards on climate later this year - in a fraction of the time usually taken. I
have very little doubt that in the future we will look back at the ISSB's work as a
fundamental building block of comparable global green markets.
The growth of green finance
Fourth, we have seen and continue to see growth in the green finance market. The
share of green finance in total finance has steadily increased, reflecting burgeoning
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investor demand and the financial system's ability to innovate. That poses new
challenges, including greenwashing, and markets regulators like the FCA are
responding accordingly.
But it's not only green products we need to see growth in. More fundamentally, we need
to see an increase in transition finance projects that help business deliver long-term
emissions reductions - greening our future economy, not just investing in the currently
green.
To that end, I welcome the Government's 2023 Green Finance StrategyOpens in a new
window. It includes a huge number of measures, but I was especially pleased to see
commitments that will create the required cross-economy infrastructure for financing -
including sector investment plans, an industry-led Transition Finance Market Review,
and a Net Zero Business and Investment Group to advise government on the needs of
the private sector to mobilise capital.
Turning aspiration into action
The reason I have spent some time on these four areas is not just because a lot has
happened. It is because it is important to recognise the progress we have seen.
But have we reached a tipping point where firms' capabilities and understanding of the
opportunities and risks from transition are driving strategic decision-making?
Well here is the reality check. The shift I had hoped to see in stronger linkages between
climate change and strategic decision making across the economy have proved harder
to deliver in practice.
Why is that? Undoubtedly, those headwinds of the last three years and for which we
have no recent precedent have reduced our collective ability to take action. This is
undeniably unfortunate - but it is a legitimate rationale.
Indeed, against this backdrop we have perhaps seen more progress than might have
been expected. But we cannot get away from the fact that regardless of this legitimacy,
climate risks continue to build and still need to be addressed.
Beyond these unexpected headwinds, the key challenges have come from foreseeable
sources. I am conscious I have adopted a number of lists today - but bear with me for
one final one as I set out four key challenges we will need to overcome if we are to turn
aspiration into action that advances the transition. And in the spirit of being solutions
focused, not just a naysayer, I will also provide views on how to overcome each of the
challenges.
Challenges to advancing the transition
The first challenge is that filling capability gaps in the transition finance
infrastructure takes time, so we need to continue to take urgent steps now.
Collectively we need to equip the financial sector with forward-looking information from
the real economy to allocate capital effectively and mobilise finance at scale.
That means the rapid implementation of ISSB standardsOpens in a new window ,
finalising the Transition Plan Taskforce's frameworkOpens in a new window for
transition plans, and the adoption of innovations that reduce greenwashing such as
product labels.
The Government's 2023 Green Finance StrategyOpens in a new window sets out
further detail on the timeline for Sustainability Disclosure Requirements and commits to
reflect developments in international standards. It also commits to consult on the
requirements for the UK's largest companies to disclose their transition plans.
But, the responsibility for driving forward the transition to net zero is not only for
governments and the authorities in building the frameworks. As NEDs, it includes all of
your firms in using those frameworks. And you can, and must, make progress now
whilst policy is developing - ahead of regulation and to support the development of best
practice. A necessary foundation for that is investing in education to increase your
staff's understanding of climate issues. Without that, none of this can happen.
Transition plans are fundamental to driving the right transition. They allow financiers
both to manage their risks and to allocate capital to support real economy
decarbonisation. And by highlighting where there is clarity about the way forward and
where gaps remain, they compel the right conversations. I encourage you all to engage
in them now.
The second challenge is that the world does not stand still. We have seen
unexpected political and economic headwinds and it seems prudent to assume
more will come.
With unexpected headwinds and limited bandwidth, longer-term issues can end up
deprioritised. Issues do not though go away - quite the opposite, they build in the
background. So we all need to be nimble and adaptable in our responses to the
nearterm whilst continuing to make progress on the long-term.
We must also learn lessons as we go. Russia's illegal invasion of Ukraine, for example,
was a shock to our transition pathway and highlighted the sorts of disorderly transition
risks we have been worried about. We saw first-hand the economy-wide costs of a
necessary reduction in (Russian-imported) fossil fuels before alternative energy sources
were in place - a reminder of the costs of disorderly transition.
But we cannot ignore the broader challenges. The fallout of this crisis and the near-term
imperative to tackle energy security issues has reduced bandwidth to address other
issues. This is a good segue to my third challenge.
The third challenge is that it is difficult, but essential, for real economy and
financial firms to make transition-driven business decisions in the absence of
complete clarity on our pathway to net zero.
It is easy for me to stand here and tell you that you should be making decisions now
that stretch many years into the future, to manage the risks and seize the opportunities
of net zero, without full clarity on the policy path to get there. But we need to recognise
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 policy
making is formidable.
We should also not be in any doubt that the transition is already building, creating
opportunities and crystallising risks, and that its speed will only accelerate. Within the
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UK, policies on energy efficiency in buildings are driving changes now. And transition
policies elsewhere such as the US Inflation Reduction Act will have on-shored impacts
for the UK.
So firms cannot, and should not, delay taking action to better understand how transition
might impact their businesses.
As I mentioned earlier, the CBES revealed a significant gap in the understanding of real
economy firms on what the transition to net zero means for them. Whilst I recognise
there is uncertainty, I urge firms to explore how different scenarios are relevant to their
strategy, to test their specific vulnerabilities and to identify opportunities. Here at the
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Bank, we have helped create tools to support such analysis. And they continue to be
enhanced. They include carbon prices consistent with different pathways to net zero to
help you identify robust strategies. I encourage you to use them.
And the fourth challenge is that 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. That does not
mean immediately ceasing to deal with high emission counterparties and suppliers.
That does not necessarily remove emissions, perhaps chasing them into the shadows
instead.
Rather, economy-wide emissions reductions will come through proactive engagement
with counterparties and suppliers, and decisions aligned to the transition over time. This
means understanding the needs of firms up and down the supply chain and having
difficult discussions about steps to reduce emissions. And smaller corporates will need
help from larger corporates and their financiers to develop their climate expertise. The
collaboration between GARP and Chapter Zero we see today shows how effective that
can be in driving faster progress.
I truly believe that transformation can come from constructive and systematic
engagement with your value chain. I therefore urge you to convene your opposite
numbers in and around the real economy. Chapter Zero is a great network. Who knows,
the source of your Scope 3 emissions may be sat in this room!
Conclusion
Let me conclude.
We know the costs of transition to a net-zero economy are lowest with early and
wellmanaged action. And we are making good progress in supporting that transition,
arguably more than we might have expected given the shocks we have faced.
But there is still much more to do. We have not yet reached the tipping point where we
have built the capabilities and the transition finance infrastructure that will support the
right strategic decisions in an unavoidably uncertain transition.
We all have a role to play in driving progress. Governments globally have the key role in
developing the policy paths and infrastructure that deliver the transition and draw us
closer to this tipping point. Central banks and regulators can operate within their
objectives to catalyse, complement and amplify those policies. And, business and
finance can - indeed in order to manage their future risks will need to - make progress
whilst policy is developing, ahead of clarity on sectoral paths and regulatory practice.
Be assured that the difficult conversations that follow are a sign of success on our
pathway to net zero, not a sign of failure.
Waiting for certainty and perfect information creates an excuse to go slowly. But this is
a collective action problem where seemingly rational individual inaction makes our
collective future problems much bigger. So we must not let perfection be the enemy of
progress. And after all, managing uncertainty is what you do all the time. Be brave here
too.
I will leave you with an encouragement (again) to each play your role, and to make the
most of this important network.
I would like to thank Jenny Clark, Tim Rawlings, Chris Faint, David Swallow and
Theresa Löber for their help producing this speech.
1
In pathways that limit warming to 1.5°C with no or limited overshoot, net global GHG
emissions are projected to fall by 43% below 2019 levels by 2030. See IPCC (2023), '
AR6 Synthesis Report: Climate Change 2023Opens in a new window '
2
World Economic Forum (2022), 'Analysis: Global CO2 emissions from fossil fuels hits
record high in 2022Opens in a new window '
3
From around 0.1% in 2012 to above 4% in 2021. See The City UK (2022), 'Green
finance: a quantitative assessment of market trendsOpens in a new window '
4
40% of homes in England now have an EPC rating of B and C or better. See
Department for Business, Energy & Industrial Strategy (2022), 'Energy efficiency: what
you need to knowOpens in a new window '
5
See CFRF (2022), 'Climate Financial Risk Forum Guide 2022: Scenario Analysis in
Financial FirmsOpens in a new window', NGFS (2023), ' Scenarios PortalOpens in a
new window', Bank of England (2021), ' Guidance for participants of the 201 Biennial
Exploratory Scenario: Financial risks from climate changeOpens in a new window'