The Bank of England has launched one of the most ambitious attempts to date to quantify the risk that climate change poses to the financial system.
Banks and insurers will face climate stress tests in a similar way to the financial stress tests they already do.
It is a project that could ultimately result in banks and insurers having to hold more capital to do certain kinds of business.
And that could have profound effects on the way the economy is funded.
Bank officials told journalists that the value of every asset on the face of the planet will be affected by climate change. Where values change, there is financial risk and the bank wants to measure it – and then manage it.
Large banks and insurance groups will be asked to go through their balance sheets almost asset by asset to assess the risks posed by a range of climate scenarios.
The Bank of England recognises there are two types of financial risk posed by climate change. There are physical risks arising from weather related events – floods, droughts, fire, etc.
And then there are what it describes as transition risks. Things that happen as a result of adjusting to a low carbon economy – meat becoming more expensive, costs incurred in the mandatory insulation of homes.
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