news / speeches second, risk management for the market to understand where climate risks and opportunities lie, disclosures need to go beyond the static to the strategic. that means assessing the resilience of firms ’ strategies to transition risks. this is hard. only half of tcfd supporters systematically conduct scenario analysis and, of those that do, three fifths don ’ t disclose it. fortunately, a number of promising initiatives are currently in train to build best practice. first, tcfd case studies – from rio tinto to unilever and citi – detail characteristics of good scenario analysis. second, the tcfd knowledge hub provides guidance, research, tools, standards, frameworks and webinars. third, the bank of england will become the first regulator to stress test its major banks and insurers against different climate pathways, including the catastrophic business – as - usual scenario, the ideal – but still challenging – transition to net zero by 2050, and the late policy action – or climate minsky moment – scenario that could bring a sudden recognition of the scale of stranded assets. our stress test of the world ’ s leading international financial centre will show how major financial firms expect to adjust their business models, and what the collective impact of these responses could be on the wider economy. it will reveal the banks – and by extension companies – that are preparing for the transition to net zero as well as those who have not yet developed strategies consistent with america ’ s pledge or the uk ’ s legislated commitment to net zero. to take this approach global, we will share it with the 50 other central banks and supervisors in the network for greening the financial system ( ngfs ) so that they can stress test their own financial systems, which cover two thirds of the world ’ s emissions. finally, return. the paris agreement calls on the financial sector to reorient financial flows in line with the two degree target. achieving this transition will require sustainable investment to go mainstream. to do so, sustainable investment must do more than exclude incorrigibly brown industries and finance new, deep green technologies. sustainable investing must catalyse and support all companies that are working to transition from brown to green. all speeches are available online at www. bankofengland. co. uk / news / speeches to date, approaches to measuring and managing the financial implications of climate change for investments have been inadequate. carbon footprints are not forward - looking, divestments only focus on

$ 10 pa every year $ 16 pa in years 1 – 5 cumulative cf $ 140 $ 100 $ 80 npv ( rational ) $ 73 $ 66 $ 63 $ 49 $ 52 $ 55 ranking ( rational ) npv ( myopia ) ranking ( myopia ) in the absence of short - termism, project a is selected. its payouts are back - loaded but significant ; it generates a net excess return of 22 %. 17 short - termism hits such long duration projects hardest. the impatient investor chooses project c. this project delivers lower cashflows but these are front - loaded. in npv terms, the project selected is the worst on offer, whereas the rationally optimal project ranks last. capital allocation is not just sub - optimally low ; it is also skewed towards sub - optimally short - duration projects. ( b ) asset pricing consider now a formal model of multi - period equity price determination. finance theory typically assumes that investors care about both the level and uncertainty of their wealth and are risk averse. in this world, agents require a premium to invest in a company. more formally, the expected return can be written as the sum of the risk free rate and a companyspecific risk premium for company j : 18 the actual return on an investment is the sum of the capital gain and the dividend yield : assuming an efficient market, actual returns differ only from expected returns due to a forecast error which is uncorrelated with expected returns. 19 using this assumption, we can substitute ( 4 ) into ( 3 ) to give an equation for the equity price. the return is $ 73 – $ 60 = $ 13, divided by the cost of investment. this is the case with the capital asset pricing model ( capm ) ( lintner ( 1965 ), sharpe ( 1964 ) ) and arbitrage pricing theory ( ross ( 1976 ) ). under the capm, for example, the company specific risk premium is equal to the company specific beta multiplied by the market risk premium. this means. that is, we assume that bis central bankers ’ speeches. so the price of the security is simply the expected price and dividend in the next period, discounted by the sum of the risk - free rate and the company - specific risk premium. by repeated substitution, this asset pricing equation can be written as a generalised form of ( 1 ) : the current share price is a function of future discounted dividend streams and