The Governor of the Bank of England (BOE), Mark Carney, has outlined starkly the three broad channels through which climate change can affect financial stability. In a speech at a Lloyd’s of London dinner last night he said investors today face “potentially huge” losses from climate change action that could make vast reserves of oil, coal and gas “literally un-burnable.”

“While there is always room for scientific disagreement about climate change (as there is with any scientific issue) I have found that insurers are amongst the most determined advocates for tackling it sooner rather than later.  And little wonder.  While others have been debating the theory, you have been dealing with the reality” Mr Carney told his audience.

Since the 1980s the number of registered weather-related loss events has tripled, he added.  

Inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade.

“The challenges currently posed by climate change pale in significance compared with what might come” he warned, adding - “The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security.”

The effect of climate change on financial stability manifests itself first through physical risks: “the impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade” he said.

Secondly, there are liability risks: “the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible.”  Such claims, he said “could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest.” 

Finally, he mentioned transition risks: “the financial risks which could result from the process of adjustment towards a lower-carbon economy.  Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent” said Mr Carney.

The BoE’s Prudential Regulation Authority has just published a report identifying potential climate risks for the UK insurance industry it supervises, which manages nearly £2trillion ($3.03trillion) in assets.

“We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix” said Mr Carney. 

While the horizon for monetary policy extends out to two to three years, for financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade, he said. “In other words, once climate change becomes a defining issue for financial stability, it may already be too late” he added.

Others need to learn from Lloyd’s example in combining data, technology and expert judgement to measure and manage risks, he suggested, noting the importance of the meetings in Paris in December in working towards plans to cut carbon emissions and encourage the funding of new technologies.

But he left his audience with a clear warning: “While there is still time to act, the window of opportunity is finite and shrinking.”

Watch the speech :


Dina Medland is an independent writer, editor and commentator with a strong focus on issues around corporate governance, ethics, the workings of the boardroom and sustainable business. She is on the team of contributors to @ForbesEurope and is an ex-Financial Times staff member who has been a regular contributor in recent years. Further details about her background and a portfolio of work – including her commercially sponsored blog ‘Board Talk’ are available on her website