Sam Woods: Climate capital

Speech (virtual) by Mr Sam Woods, Deputy Governor for Prudential Regulation of the Bank of England and Chief Executive of the Prudential Regulation Authority (PRA), at a webcast hosted by the Global Association of Risk Professionals, 24 May 2022. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Climate change is now firmly in the focus of prudential regulators across the globe. In that context, I want to use this speech to outline the results of our first exploratory scenario exercise on climate risk – the 'CBES' – which were published earlier today. But before that, I want to put those results in context, and set out how I see climate risk fitting within the Prudential Regulation Authority's (PRA's) wider mission.

The role of prudential policy

Tackling the threat from climate change will involve efforts by governments across the globe, as well as by many other organisations and individuals. In the UK, the effort to get to Net Zero greenhouse gas emissions is being led by government, with a wide range of other public bodies doing their part. Where does prudential policy fit into this effort?

The role of prudential policy is to ensure the safety and soundness of banks and insurers, so that they can continue to provide vital financial services to the real economy. Getting our core job right, and so maintaining financial stability, is far and away the most important thing we can do to support the fight against climate change. Achieving net zero will not be possible unless our societies make considerable investments in developing and disseminating new technologies, and will require major changes across the economy. A stable financial system can support households and businesses through these changes, and channel investment where it needs to go to support the transition.

Transitioning to net zero will be a major challenge for our institutions and societies even in a benign economic environment – doing so without confidence in the basic functioning of the financial system would be near impossible. It is therefore vital that firms can withstand risks to their safety and soundness, including those that arise as a consequence of climate change – both 'physical' risks like flooding and extreme weather events, and 'transition' risks that arise as the economy moves away from carbon-intensive activities.