Bank of England Governor Mark Carney addressed the UN Climate Action Summit last week and called for a global step change in bringing climate risks and resilience into the heart of financial decision making.

Mr Carney’s speech is the latest demonstration in a string of developments this year that UK regulators expect the financial risks of climate change to be firmly on the agenda for banks, insurers and other financial institutions. Both the PRA and the FCA have made it clear that they consider the physical risks of climate change and the risks arising from transitioning to a low-carbon economy to be material financial risks, and that they expect firms to take action to ensure those risks are considered, adequately disclosed, and provided for.

In his speech, Mr Carney drew on the progress made by the UK this year and explained that the step change can be achieved globally by:

1. Disclosure of climate-related financial risks becoming comprehensive and ultimately mandatory. The Task Force on Climate-related Financial Disclosures (TCFD) has developed a framework for corporate disclosure of climate-related risks and opportunities. In his speech Mr Carney explained that over four-fifths of over 1100 top G20 companies now disclose climate-related financial risks, and that overall the quality of those disclosures has improved. The UK Government has already announced in its Green Finance Strategy published in July 2019 that it expects all listed companies and large asset owners to report climate risks by 2022, and Mr Carney encouraged other countries to “get involved”.

2. Transforming climate risk management. Mr Carney called for the providers of capital – banks, insurers, asset managers – and regulators too – to improve their understanding and management of climate-related financial risks. He explained that the Bank of England has recently set out its supervisory expectations for the governance, management and disclosure of these risks by banks and insurers, and that the Bank will be the first regulator to stress test its financial system against different climate scenarios, with the aim of driving cutting-edge risk management techniques mainstream.

3. Sustainable investing going mainstream. Mr Carney explained that this means supporting all companies that are working to transition into green companies, and that investment strategies such as “tilt strategies” (which overweigh, or tilt towards, high environmental, social and governance (“ESG”) stocks) and “momentum strategies” (which focus on companies that have improved their ESG rating) must go mainstream. He explained that the particular challenge here is to develop a common taxonomy, or classification system, to help financial markets rigorously identify genuine environmental outperformance and direct investment accordingly.