View from Brussels - June 2020

As governments and regulators across Europe consider how they use recovery from the Covid-19 as a force for progress, one of the central components will be the drive towards a greener economy.

Today, the Climate Financial Risk Forum, co-chaired by the FCA and the PRA, has published a guide to climate-related financial risk management offering support to firms on how to integrate these considerations into their risk, strategy and decision-making processes.

Earlier this month, for the first time, the Bank of England published its own climate-related financial disclosure which sets out the Bank’s approach to managing the risks from climate change. This is designed to address “the urgent need to assess, manage and deepen understanding of the financial risks from climate change”.  The Bank’s strategy will centre on risk (for firms and investors to measure and manage the financial risks of climate change), reporting (to improve the transparency of companies’ exposure to climate-related risks) and return (to better equip firms and investors to identify the frictions and the opportunities in the transition to a carbon-neutral economy).  In 2021, the Bank plans to incorporate in its stress tests of banks and insurers the financial risks that could arise in a variety of different climate scenarios.

The Basel Committee on Banking Supervision surveyed its members (international central banks) during the height of the pandemic and a majority considered it appropriate to address climate-related financial risks within their existing regulatory and supervisory frameworks. Around 40% of them, including the Bank of England, have issued, or are in the process of issuing guidance for banks and insurers on how they should incorporate climate change in their governance, risk management, scenario analysis, and disclosures.

Meanwhile, in Brussels, the EU’s Green Deal (the subject of my December blog) which was at the heart of Commission President Ursula von der Leyen’s programme, is floundering. The €1 trillion earmarked for the European Green Deal over the next decade has been overshadowed by the amount of state aid granted by EU Member States, including the UK, to mitigate the impact of Covid-19 which at the start of May stood at €1 trillion. The criticism from environmental campaign groups such as Greenpeace is that for the most part few environmental conditions have been attached to these bail outs. As Europe emerges from the shadows of the pandemic, how will it honour its commitment to become the first climate-neutral continent by 2050?

Published 24 Jun 2020

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