An overview of Sarah Breeden’s speech: Climate action: approaching a tipping point?
In a recent speech, Sarah Breeden, Executive Director at the Bank of England, outlined the unique roles that governments, business, finance and central banks have in our journey to reach net zero. Although we have made good collective progress so far, there is an ever-growing need to turn aspiration into actionable strategies in order to best equip the sector for its role in the climate transition.
Referencing an earlier speech given in 2020, Ms Breeden outlined how she had split the decade into three operational phases: “Firstly, recognising and identifying the financial risks climate changes poses. Secondly, building capabilities to enable us to turn aspiration into action. And thirdly, making business decisions to advance the transition.” Since giving that speech, there have been unprecedented difficulties: the COVID pandemic, war, economic struggles, slowing our collective journey to net zero – yet considering the stark warnings from the most recent IPCC report we must prioritise action, even in these times of great uncertainty.
To this end, Ms Breeden identifies four core dimensions: scenario analysis; firm risk management capabilities; disclosure; and green finance.
1. Learning from scenario analysis
A crucial step for central banks in the transition to net-zero is a comprehensive analysis and understanding of climate risks and how to manage them. The results of the Bank of England’s (BoE) Climate Biennial Exploratory Scenario (CBES) published in 2022, identified clear gaps across real economy in firms’ understanding of what the short- and long-term impact of the climate transition will have for not only on their businesses, but also their real economy customers. To understand the impact of the transition and in order to futureproof organisations, central banks must work to successfully analyse what the future holds in regard to the climate challenges we face today. The results of the BoE’s CBES prove that “costs are lowest, and opportunities greatest, with an early and well managed transition.”
2. Managing climate related financial risks
Although praising the “significant progress” shown by firms in the supervisory expectations for climate risks in 2019, in her speech Ms Breeden underlines the remaining distance banks must travel to successfully develop their climate-risk management capabilities. Many banks and insurers are still at the stage of developing capability. Further investment is therefore needed across firms in order to create actionable strategies, something which has been set out in the Bank of England’s Dear CEO letter.
3. Progress on climate related disclosures
Since 2020, significant progress has been made across the UK and around the globe in regard to climate finance-related disclosures. Mandatory disclosures for large corporations are “driving the right conversations around board tables.” This is set to continue under the Task Force for Climate-related Financial Disclosures (TCFD), and later this year the International Sustainability Standards Board (ISSB) will publish a global standard on climate, the first of its kind. Ms Breeden commented: “I have very little doubt that in the future we will look back at the ISSB’s work as a fundamental building block of comparable global green markets.”
4. The growth of green finance
In this last dimension, the focus is on the progress made in the UK green finance market, citing the increase in green finance shares, growing investor demand and continuing innovation across the sector. However, this has created new challenges such as greenwashing, something which will require continued regulation from supervisory authorities. Not only do we need to see continued growth across green finance, Ms Breeden also underlined the fundamental need for an “increase in transition finance projects that help business deliver long-term emissions reductions – greening our future economy, not just investing in the currently green.” It is important for lenders to consider this in their strategies and decision making, so as to ensure their investments are indeed sustainable.
What challenges do we face?
There are, of course, challenges ahead for the UK banking sector in managing the climate transition alongside government policy. Firstly, the process of filling capability gaps will require time, but this makes our immediate steps all the more crucial: “The responsibility for driving forward the transition to net zero is not only for governments and the authorities in building the frameworks […] you can, and must, make progress now whilst policy is developing – ahead of regulation and to support the development of best practice. A necessary foundation for that is investing in education to increase your staff’s understanding of climate issues. Without that, none of this can happen.”
There are further challenges to think about, such as the unprecedented current political, global landscape. Ms Breeden described the need for the sector to be adaptable in its response to further unexpected headwinds, and not ignore the broader challenges of climate change that we still face. There is a need to build capabilities in the immediate term which will enable action to “drive long-term reductions in emissions through their value chain.”
In all, whilst good progress has been made, especially in light of the economic and political hardships of the past few years, there is a long distance ahead towards the climate transition. However, as highlighted in this speech, the urgency and action needed to address current and future climate challenges will not diminish. Therefore, it is crucial that we act now, as Ms Breeden states: “Waiting for certainty and perfect information creates an excuse to go slowly. […]. So, we must not let perfection be the enemy of progress. And after all, managing uncertainty is what you do all the time. Be brave here too.”