leading the change : climate action in the financial sector speech given by sarah breeden, executive director, uk deposit takers supervision executive sponsor for climate change uk finance webinar held during london climate action week 1 july 2020 i am grateful to zane jamal and theresa lober for their assistance in drafting these remarks all speeches are available online at www. bankofengland. co. uk / news / speeches good afternoon everyone. i would like to thank uk finance for inviting me to speak today during london climate action week on what i consider to be the defining issue of our time – climate change. i realise that this may seem an odd claim for a central banker to make in the middle of a global pandemic that has already led to the largest fall in uk growth in over three hundred years. 1 but our economy and financial system, with the right support, should eventually recover from covid - 19. in contrast, climate change, left unchecked, will lead to irreversible harm for generations to come. that demands our continued attention even as we deal with the current crisis. we are at the start of a critical decade for climate action where the decisions we take today will shape the future of our planet for decades to come. ‘ action ’ being the key word. if the previous decade was marked by a ‘ call to action ’, then this coming decade must answer it. that means an economy - wide orderly transition to net - zero emissions. we all have a role to play in that. and the financial sector should be instrumental in driving that change. today i want to move us from aspiration to action, and set out how we can achieve this in practice - both at a micro - level, through the decisions each of you make as individual financial institutions, and at a macro - level, across the financial system as a whole. risks from climate change but first, a reminder of why climate change matters to you as financial institutions and to us as the central bank and supervisor. clearly, climate change matters for the environment and for our planet. but what has become self - evident now, even if it was not five years ago, is that climate change creates financial risks. 2 these can arise from physical risks, whether acute weather events like floods and wildfires, or longer - term climate trends like the rise in sea level and record - breaking temperatures in the arctic circle3. they can also arise from transition risks – the changes in government policy, technology and consumer preference

. there are signs that credit conditions facing firms have already tightened. the terms on corporate bank borrowing are often directly linked to the rates that banks charge each other. these rates have risen and remained high. our latest intelligence suggests that the main lenders have tightened the terms on which they are willing to lend to businesses, and they plan to tighten them further. uk firms ’ financial position is currently pretty healthy, on average, and large corporate borrowers in particular may have good alternatives to bank borrowing. but smaller and more highly geared firms may be more adversely affected. in time tighter credit conditions could mean weaker business investment, though so far forward indicators of investment intentions still point to fairly strong growth. and any marked increased in uncertainty about demand conditions could lead to investment plans being shelved. but it is still early days – too early to draw strong conclusions about the size of these effects. even more uncertainty surrounds the possible impact of tighter credit conditions on household spending, which alone accounts for three fifths of total domestic demand. there is already some evidence that banks are tightening the price and non - price terms on which they lend, especially to borrowers with relatively poor credit histories. and quoted fixed rate mortgage rates have already risen relative to market expectations of bank rate – though since markets now expect bank rate to fall instead of rising, the pick up in actual mortgage rates remains quite small. overall, households seem to be in a relatively strong position : debt has risen a lot relative to incomes, but so too have holdings of financial and real assets. mortgage arrears and repossessions remain well below their peak levels in the early 1990s. but the share of income which needs to be devoted to interest rate payments was already set to rise sharply, largely as a result of rising debt levels. and there is a growing minority of households who are reporting difficulties with their debts. in short, it looks as if events in financial markets are beginning to affect the terms offered to retail borrowers. this should act as a brake on consumer spending and investment. but the size of this effect is highly uncertain, partly because so far it seems to be focussed on certain groups. much may depend on whether recent developments shake consumers ’ confidence in future income growth and employment – and so far that does not seem to have happened. what about possible longer term effects on the price and availability of credit? over the past three years, competition and financial innovation have put steady downward pressure on the rates at which banks have been prepared