Detailed and standardised reference scenarios are needed for this kind of assessment, such as those being developed by the Network of Central Banks and Supervisors for Greening the Financial system.27  26 27  https://www.bankofengland.co.uk/-/media/boe/files/annual-report/2020/climate-related-financial-disclosure-report-2019-20.pdf https://www.ngfs.net/sites/default/files/medias/documents/820184_ngfs_scenarios_final_version_v6.pdf 11  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  11  Chart 5: Estimate of APF corporate  Chart 6: Alternative warming potential metrics for same  holdings ‘portfolio warming potential’  portfolio  Source: see footnote 26. Source: see footnote 26. Building block 2: capital instruments The second key building block for an effective capital markets infrastructure for trading climate risk is a set of viable capital instruments. As I mentioned earlier, it is not clear a separate climate asset class is needed in steady state: dedicated ‘IT investment bonds’ or ‘physical buildings equity’ are for example pretty rare! But climate-linked instruments can be very helpful on the transition path, to give focus to the need for change, help meet specific investor needs, and provide a credible ‘put your money where your mouth is’ commitment from issuers to deliver on specific projects until more robust and consistent decision useful metrics can be developed. A wide variety of new climate-linked markets have begun or are under discussion, including for example Voluntary Carbon Offsets,28 derivatives products to manage risks in renewable energy29 or green mortgage-backed securities.30 But I want to focus my remarks today on the most prominent example: that of climate-linked, or ‘green’ bonds.

But increasingly the task will also fall to the capital markets – and that’s where I want to focus my remarks today. Well-functioning capital markets are amongst the most powerful tools we have for turning the vision of a resilient carbon neutral economy into reality.7 Cold hard price incentives that reward investments aligned with that goal, and penalise those which aren’t, are worth a thousand entreaties on the dangers of inaction. Establishing those incentives requires three key building blocks. First, credible public metrics of the climate impact of specific investment projects and corporate activities, and the financial risk and return involved. Second, effective capital market instruments to package that risk and return and match it with 4  https://www.unenvironment.org/news-and-stories/press-release/cut-global-emissions-76-percent-every-year-next-decade-meet-15degc https://www.iea.org/reports/global-energy-review-2020/global-energy-and-co2-emissions-in-2020 6 See eg https://www.irena.org/financeinvestment/Investment-Needs, https://www.fca.org.uk/publication/corporate/climate-financial-riskforum-guide-2020-innovation-chapter.pdf and https://www.iea.org/news/deep-energy-transformation-needed-by-2050-to-limit-rise-inglobal-temperature 7 Indeed, a recent paper by Ralph De Haas and Alexander Popov (https://www.ecb.europa.eu/pub/economicresearch/resbull/2019/html/ecb.rb191127~79fa1d3b70.en.html) argues that capital markets (and in particular equity markets) may be superior to banks in incentivising climate-supporting investment. 5  3  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  3  growing investor demand. And third, asset allocation strategies allowing those investors to construct portfolios aligned with, and facilitating, the transition to a carbon neutral economy. For much of the past decade, those three building blocks have been slow to develop, or vulnerable to charges of ‘greenwashing’ (projects, vehicles or investment strategies that are ‘green’ in name only).