6 The Bank of England set out in its July 2019 FSR its intention to test the UK financial system’s resilience to the physical and transition risks of climate change. It will gather views on the design of the exercise and, as a first step, will publish a discussion paper in autumn 2019. More information available at: https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2019/july-2019.pdf. 3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  Such “tilt” investment strategies, which overweight high environmental, social and governance (ESG) stocks, and “momentum” investment strategies, which focus on companies that have improved their ESG rating, have outperformed global benchmarks for close to a decade.7 The mainstreaming of such strategies and the tools to pursue them are essential. At present, one of the biggest hurdles to doing so is the inconsistent measurement of ESG. We need a common taxonomy to help financial markets rigorously identify environmental outperformance and to direct investment accordingly. The EU’s Green Taxonomy and the Green Bond Standard are good starts, but they are binary (dark green or brown). Mainstreaming sustainable investing will require a richer taxonomy – 50 shades of green. One promising option, highlighted in this week’s initiative of UN’s Climate Financial Leaders, is the development of transition indices composed of corporations in high-carbon sectors that have adopted lowcarbon strategies.8 Such approaches are essential for our citizens to make sure their money is invested in line with their values.

The test will motivate banks, insurers and asset managers to address data gaps and to develop cutting-edge risk management approaches consistent with a range of possible climate pathways. The Bank will develop the approach in consultation with industry, including best practice insurers, and other informed stakeholders including experts from the Network for Greening the Financial System and the PRA’s Climate Financial Risk Forum. Return There is increasing evidence that sustainable investment can generate excess returns, particularly for investors, like insurers, with longer term horizons. One of the biggest hurdles to channelling mainstream finance to sustainable investment is the inconsistent definition and measurement of environmental, social and governance (ESG) criteria. An agreed taxonomy would allow markets to understand better where there is real outperformance and direct investments accordingly. The EU’s Green Taxonomy and the Green Bond Standard are good starts but they are binary (dark green or brown) and don’t account for progress from brown to green – progress that could make a significant contribution to our climate goals. One possible solution, as recommended by the UN’s Climate Financial Leaders Initiative, could be the development of transition indices which track companies in high-carbon sectors that adopt low-carbon strategies. Such approaches are essential for our citizens to make sure their money is being invested in line with their values. Conclusion Ultimately, the speed with which the new sustainable finance develops will be decided by the coherence and credibility of countries’ climate policies.