Over the next two years, the current process of disclosure by the users of capital, reaction by the suppliers of capital, and adjustment of these standards will be critical to ensure that the TCFD standards are as comparable, efficient and as decision-useful as possible. Risk management With better information, the frontier will be to upgrade risk management and optimise returns. As the supervisor of the world’s fourth largest insurance industry, the Bank of England knows that general insurers and reinsurers are on the front line of managing the physical risks from climate change. Insurers have responded by developing their modelling and forecasting capabilities, improving exposure management, and adapting coverage and pricing. In the process, insurers have learned that yesterday’s tail risk is closer to today’s central scenario. And leading insurers also understand that the breadth, magnitude, and foreseeable nature of climate risks— mean the biggest challenge will be to assess the resilience of firms’ strategies to transition risks. That’s why, the Bank of England just set out our supervisory expectations for banks and insurers regarding their governance, risk management, strategic resilience and disclosure of climate-related financial risks. 8  All speeches are available online at www.bankofengland.co.uk/news/speeches  8  And in June the Bank announced that we will be the first supervisor to stress test our financial system for resilience against different climate transition pathways: ranging from early and orderly to late and disruptive.

Climate-resilient infrastructure assets are well suited to life insurers that need reliable returns over long-term investment horizons. This is even more compelling in a low-for-long interest rate world. However, as the IDF has flagged at present only 2.5% of insurance assets managed are allocated to infrastructure17. So the world needs much more investment in infrastructure, and greater risk sharing of climate risks. Insurers have a unique ability to meet both needs. 15  See https://oasislmf.org/. Global Commission on the Economy and Climate (2016), The Sustainable Infrastructure Imperative. See: https://newclimateeconomy.report/2016/. 17 World Bank (2017), Risk and Capital Requirements for Infrastructure Investment in Emerging Market and Developing Economies. Available at: https://www.worldbank.org/en/news/feature/2017/12/22/risk-and-capital-requirements-for-infrastructure-investment-in-emerging-market-anddeveloping-economies. 16  6  All speeches are available online at www.bankofengland.co.uk/news/speeches  6  In this context, the impact of regulation on the provision and cost of infrastructure finance must be carefully considered. As World Bank studies have shown, there is evidence that infrastructure debt can be lower risk as it has more predictable and stable long-term cash flows and has low correlation to other assets. The historical default experience of infrastructure debt suggests a ‘hump-shaped’ credit risk profile, which converges to investment grade quality within a few years after financing has closed. However, such robustness is not reflected in the standardised approaches for credit risk in most regulatory frameworks. The World Bank study suggests that capital charges could decline significantly for a differentiated regulatory treatment of infrastructure debt as a separate asset class.