Senior Bank of England staff members who resigned from climate and nature risk supervision roles have complained the central bank neglected the issues, leaving the UK financial sector underprepared.
Six people who left the BoE between 2020 and last year told the Financial Times that climate change had been deprioritised under governor Andrew Bailey. Some said he had diverted the institution’s focus away from risks perceived as “soft” and hard to quantify.
Senior managers had not been empowered to take climate risk seriously as part of mainstream supervision work since Bailey took over from Mark Carney, added the former employees, some of whom left as part of career progression and others because they were frustrated with the BoE’s approach.
“The self-censorship and departures were a recurring pattern,” said one former employee of their experience of Bailey’s tenure.
Another former staff member said: “The biggest risks facing the financial system . . . are from climate and environmental risk . . . and I just felt that what the bank was doing to address those things was insufficient.”
As BoE governor between 2013 and 2020, Carney was one of the first central bankers to highlight the challenge posed by rising temperatures to financial stability, warning 10 years ago of the “tragedy of the horizon” that lenders and insurers were failing to price in.
But the debate over how far central banks should intervene to minimise climate risks to the financial system has changed in recent years, especially since the shift against climate action under US President Donald Trump.
Last month Sarah Breeden, deputy governor for financial stability, said the BoE should stay in its “swim lane” when tackling the financial risks of climate change.
One senior BoE official said: “It is important not to advocate for a certain policy direction; we just point to risks.”
Climate change featured in a list of four critical government policy aims the BoE’s financial policy committee was tasked with supporting, on top of its primary aim of protecting financial stability, until 2023, when then-chancellor Jeremy Hunt removed it.
Asked about the change by a parliamentary committee in February last year, Bailey said: “There is a financial stability risk [from climate change]. We haven’t ignored that.” But he added: “The depth and breadth of the work we do will be trimmed back somewhat.”
BoE executives have recently made speeches on the relevance of climate risk analysis and management to monetary policy and to the resilience of the City of London. A senior official said it was now “in the middle of the pack”, with the European Central Bank “in the lead” and the US Federal Reserve “behind”.
But the former employees said they feared the change in priorities had caused the BoE’s technical risk modelling capacity to fall behind that of the private sector, even as the effects of climate change on the UK have intensified.
Suggested improvements to BoE supervision of banks and insurers were at times declined on capacity grounds, several former employees said. “I felt very frustrated we couldn’t do the risk review we needed to do to really understand what was going on at these firms,” said one.
A person working on climate risk for insurers said staff hours in this area were cut by roughly one-third between 2022 and 2024.
Four former employees also said nature risks — for example from pollination collapse or species extinction — were a particular blind spot.
The BoE last year opted not to put its name to a Green Finance Institute paper it had worked on that found the hit to UK GDP from nature-related risks could be greater than the global financial crisis or Covid-19, people familiar with the matter said.
The BoE said: “Whilst the government is responsible for climate policy, climate risk threatening our objectives is part of the bank’s remits, and we work to take action accordingly.”
The ECB and other central banks, including the Monetary Authority of Singapore, have over time paid more attention to how financial institutions would cope with the rising mortgage defaults, insurance payouts and economic downturns linked to physical risks and those arising from government policies to curb emissions.
But there is still debate among forecasters, financiers and regulators about how systemic these risks are for finance. “For a diversified financial group, it’s pebbles,” said a former BoE staff member now working at an insurer. “Most people [in finance] don’t give a monkeys about climate change.”
Climate and nature work became less of a priority because of this attitude, a person familiar with the BoE’s current work said. “There are many things that are catastrophic for humanity without being catastrophic for finance,” they added.
However, one senior BoE official said there was less need for extra supervision on climate risk because banks under its watch had already accepted the seriousness.
The BoE’s only climate stress test to date, conducted in 2021-22, anticipated an average 10 per cent to 15 per cent annual “drag on profits” from climate change for banks and insurers.
But the scenarios underpinning central banks’ climate risk analysis did not always identify “the most likely or most severe potential outcomes”, BoE staff said last year.
The central bank’s test was intended to take place every two years but has yet to be repeated. “They need to invest in the right expertise,” said Nitika Agarwal, head of sustainable finance at the UK branch of WWF.
The BoE’s Prudential Regulation Authority and the Financial Conduct Authority have set up the Climate Financial Risk Forum for industry and regulators, which published a guide on nature-related risk last October.
The central bank is assessing the relevance of nature-related financial risks to its financial stability objective, and it is also consulting on updated supervisory expectations for banks and insurers on climate, which would ask them to fix “gaps” in how they address climate change risks.
Morgan Després, formerly head of strategy at the Banque de France, said this may signal renewed enthusiasm for climate work. But he added the BoE had in recent years exuded “a sense of caution, prudence, you name it. Climate was not that important any more.”
