LONDON, February 26 – The Bank of England (BoE) launched a new research agenda yesterday, that for the first time acknowledged systemic environmental risks such as climate change.
Carbon Tracker has introduced the concepts of unburnable carbon and stranded assets to the financial world over the last few years. They have now become the accepted lexicon for a range of financial institutions – investment banks, ratings agencies, fund managers and pension funds.
“Having engaged with the BoE around stranded assets and climate risk for several years, it is encouraging to see this major central bank seeing the need to move with the times and understand its role in dealing with one of the major challenges facing our economies today: climate change. We hope to see other financial regulators around the world responding in a similar fashion and collaborating on this issue,” said James Leaton, research director at the Carbon Tracker Initiative.
Late last year the bank revealed it would formally examine the risks fossil fuel companies posed to financial stability. Mark Carney, the bank’s governor, said it would be “deepening and widening” its enquiry after surmising the world’s coal, oil and gas reserves may be “unburnable” if global warming is to be kept within safe limits.
The bank’s general discussion paper, called the One Bank Research Agenda, published on Wednesday notes that the transformation of our energy system presents ‘transition’ risk for central banks to consider, including the potential for carbon-intensive assets becoming ‘stranded.’
In a chapter entitled, “Response to Fundamental Change”, the discussion paper states there might be more at stake for financial markets than just an impact on insurance firms:
“Fundamental changes in the environment could affect economic and financial stability and the safety and soundness of financial firms, with clear potential implications for central banks. To date, the Bank’s work in this area has primarily focused on how insurance firms might adapt to the effects of climate change given that any future increases in the frequency and severity of weather-related catastrophes places the industry at the front line of responding to the financial impacts of climate change,” the bank said.
The recent volatility of oil prices has shown what happens when there is a mismatch between supply and demand; as a result the currencies of a number of oil exporting countries have crashed over recent months. This reflects the heightened risks associated with carbon-intensive activities if an orderly transition to a low carbon future is not facilitated by financial regulators.
“Carbon Tracker’s reports on Unburnable Carbon (2011) and Stranded Assets (2013) were the first to highlight these risks and we commend the Bank’s response in turning the best minds in finance to these serious challenges,” said Mark Campanale founder and executive director of Carbon Tracker.
Carbon Tracker believes that there is a need for smarter regulation to improve the disclosures of fossil fuel companies to give the market a view of the collective risk of significant adjustments in energy markets. This could be delivered by companies being required to stress test their business model against a range of demand and price scenarios, and indicating their level of exposure to carbon-intensive assets.
Feeding into the U.S. Securities and Exchange Commission ongoing review of disclosure Carbon Tracker recently wrote to the SEC highlighting that fossil fuel company disclosures have not adequately conveyed the risks to company business models of trends towards a low-carbon economy.
“We believe fossil fuel companies should publish the embedded CO2 content of their own resources as a matter of course and that this should be mandatory,” Campanale added.
In the 2014 proxy season nearly one out of every five shareholder proposals dealt with energy and climate change, Carbon Tracker noted. Demand for these disclosures is driven by the underlying risks posed by climate and, more importantly, societal responses to address it.