The Bank of England’s climate-related financial disclosure 2023

Foreword

Climate change affects our world, our economy and our financial system. This disclosure sets out our assessment of the climate-related risks, which impact our policy function and internal operations, and our approach to managing those risks.

We have reported on the progress made by banks and insurers against our climate-related supervisory expectations; published the results of our Climate Biennial Exploratory Scenario; convened a research conference and subsequently published a report to explore links between climate and regulatory capital; and set out our latest thinking on the macroeconomic impacts of climate change.

At the same time we continue to make progress in managing the climate risks to our internal operations. Our physical operations remain on track to achieve the Bank’s target to reduce emissions by 63% in 2030 from 2016 levels consistent with limiting the rise in global average temperatures to 1.5°C above pre-industrial levels. And analysis of our financial operations has been improved, enhancing the range of forward-looking scenario-based analyses we use to better assess the exposure of our investment portfolios to climate risk.

Central to our climate disclosure work this year is the publication of our first Climate Transition Plan (CTP), which will be issued alongside this disclosure and our Annual Report. We are using it to both announce our commitment to reduce emissions from our physical operations to net zero by 2040 and set out our approach to deliver those reductions. The publication marks the culmination of a multi-year project to develop a credible and ambitious transition plan for the Bank. It is, however, only the beginning of a long term, large scale, iterative process, which will see the CTP evolve to reflect Government climate policies, maturing transition planning frameworks, technological advances and emerging best practice.

Similarly, in light of the newly released International Sustainability Standards Board climate disclosures, we will review our approach to this climate disclosure in future years. Looking ahead more generally, we will continue to focus our limited resources on climate issues that have the most impact on our objectives. We plan to advance our understanding of the financial stability risks, support the orderly transition toward a net-zero economy and engage domestically and internationally to ensure a co-ordinated approach on climate change.

Ben Stimson
Chief Operating Officer of the Bank of England

Executive summary

The Bank has committed to publish annual climate disclosures. This is the fourth climate disclosure the Bank has produced, setting out the key climate-related developments in the year to 28 February 2023. It builds on the Bank’s third climate disclosure by reflecting:

• the progress the Bank has made on its climate work plan over the past year;
• advances in climate data and modelling applied to its financial asset portfolios;
• progress on reducing emissions from its physical operations; and
• progress in the domestic and international climate agenda.

In response to these developments, the Bank has refreshed the goals, which operationalise its climate strategy, and the priorities which underpin it.

To respond to the broad range of climate-related risks (climate risks) to its core monetary and financial stability mission in an effective and strategic manner, the Bank has designated climate change as one of its seven strategic priorities covering the four-year period to February 2025. By advancing this work, the Bank will fulfil its obligations under its objectives and remits, focusing its limited resources on issues that have the most impact on those objectives and remits, as well as where the Bank can make the biggest contribution domestically and internationally.

As with the Bank’s previous climate disclosures, this year’s disclosure follows the structure recommended by the Financial Stability Board’s (FSB’s) Task Force on Climate-related Financial Disclosures (TCFD), covering four key elements: governance; strategy; risk management; and metrics and targets.

Governance

Climate risks are incorporated within the Bank’s internal governance and risk management frameworks, complemented by climate-specific processes where appropriate. As part of this, climate risks to the achievement of the Bank’s mission are discussed at the Bank’s senior executive committees prior to decisions being implemented by management across the Bank. Climate risks are also subject to additional governance processes due to the inclusion of climate change as one of the Bank’s seven strategic priorities.

At a management level, the Bank’s climate work is led by two Executive Sponsors: Sarah Breeden (Executive Director for Financial Stability Strategy and Risk and member of the Financial Policy Committee) covers the Bank’s policy functions and Ben Stimson (Chief Operating Officer) covers the Bank’s physical operations. Climate change is relevant to many parts of the Bank; from sourcing polymer for banknote production to the setting of risk management expectations for banks and insurers regulated by the Bank, through the Prudential Regulation Authority (PRA). For that reason, the Bank has an Executive Director-level cross-Bank steering group to discuss the design, implementation and execution of the Bank’s climate strategy and work plan, as well as broader climate or environmental-related issues of relevance to the Bank.

Strategy

The objective of the Bank’s work on climate change is to play a leading role, through its policies and operations, in ensuring the financial system and the Bank itself are resilient to the risks from climate change and in understanding its macroeconomic implications. Where there is alignment with the Bank’s objectives and legal framework, it acts to support the transition to a net-zero emissions economy. This contributes towards advancing the Bank’s statutory objectives for financial and monetary stability as set out in the remit and recommendations letters to the Bank’s policy committees.^{footnote [3]}

The Bank’s climate strategy is built around five key goals, which have been refreshed for 2023/24 to reflect progress the Bank has made and broader shifts in the domestic and international climate agenda.

Progress has been made against the 2023 goals over the past year, including publication of the results of the Bank’s CBES exercise for major UK banks and insurers, issuance of supervisory guidance on progress that banks and insurers have made against the Bank’s supervisory expectations on climate, and development of the Bank’s first CTP, setting out the Bank’s strategy for reducing emissions from physical operations to net zero by 2040.

Risk management, metrics and targets

The Bank is itself exposed to climate risks across both its physical operations (eg due to physical risks to its buildings) and its financial operations (eg financial asset portfolios held for monetary policy purposes). This climate disclosure sets out the Bank’s approach to measuring and managing these risks.

Since the last climate disclosure, the Bank’s critical metrics for climate risk have been refreshed to reflect developments in the Bank’s analysis of climate risk from financial and physical operations, including publication of the Bank’s CTP. The Bank’s critical metrics for climate risk are reported quarterly to the Bank’s executive and non-executive risk committees.

The Bank’s financial operations

The Bank continues to demonstrate best practice in climate risk reporting on its financial asset holdings, by disclosing analysis of both its sovereign and corporate asset holdings and enhancing its analysis to align with the latest guidance.

Static, backward-looking measures of the climate risks in the Bank’s financial operations have remained broadly stable. For example, the Weighted Average Carbon Intensity (WACI) of the Bank’s sovereign bond portfolios remained largely unchanged between 28 February 2022 and 28 February 2023, suggesting no material change in transition risks.

Such measures are helpful in comparing climate risks across different portfolios – and show that the transition and physical risks associated with the Bank’s holdings are materially lower than those in a G7 reference portfolio. But to be decision-useful (a key goal of the TCFD), climate risk metrics need to be forward-looking, and expressed in terms that can be integrated into the holistic financial risk frameworks that inform day-to-day risk management decisions across the financial system.

The methodologies for calculating such measures remain relatively new, and hence it will be some time before full risk integration is possible. To give an indication of direction of travel, however, this report contains forward-looking scenario analysis. This uses projections to estimate potential financial impacts across the Bank’s portfolios in future. It differs from point in time metrics, which provide proxy measures of financial risks today, but do not project into the future. Among other things, new experimental metrics suggest:

• The value of the Bank’s sovereign bond holdings could fall by up to 6.8% in the most adverse climate scenarios. This assumes that the future path of interest rates consistent with such an adverse scenario is immediately reflected in the bond prices. However, the pathway of interest rates across climate scenarios is uncertain and will be determined by the responses of both financial markets and central banks.
• Carbon budget pathways for sovereign issuers imply that the Bank’s sovereign asset portfolios are aligned with the 2°C Paris goal, but not with the 1.5°C ambition.
• In some adverse transition risk scenarios, the debt service ratios of households owning poorly insulated homes could increase by 9 percentage points, compared to a less than 1 percentage points for households owning the most efficient properties. These transition risks might impact borrowers’ mortgage affordability, and feed through to increased risks to mortgage collateral that the Bank accepts.

Following the Monetary Policy Committee’s (MPC’s) decision to begin exiting quantitative easing in February 2022, holdings in the Corporate Bond Purchase Scheme (CBPS) have now been almost completely unwound, through a combination of maturities and sales. The total climate-related losses that the Bank could suffer have therefore declined. The framework introduced in November 2021 to ‘green the CBPS’ was only in operation for a short period. Nevertheless, application of the framework to reinvestment operations undertaken between November 2021 and January 2022 successfully reduced transition risks of the Bank’s corporate bond holdings. It is encouraging to see other organisations, including the European Central Bank, subsequently adopted similar frameworks in their own operations.

The Bank’s physical operations

This year the Bank’s reported carbon footprint (6,150 tonnes of carbon dioxide equivalent (tCO₂e)) is the lowest since the Bank’s target was set in 2015/16, having fallen by 37% (3,666 tCO₂e) compared to 2021/22, and by 69% (13,977 tCO₂e) compared to the baseline year of 2015/16, against which the Bank measures progress.

The most significant contribution to the emissions reduction relative to 2021/22 was a decrease in the number of banknotes printed (4,452 tCO₂e). While the Bank works with suppliers to encourage them to reduce the carbon intensity of the polymer substrate used in banknote production, absolute emissions are driven by the number of banknotes printed, which is responsive to demand and is therefore variable.

The reduction relative to the baseline year (2015/16) was driven primarily by the Bank’s permanent move to renewable sources of electricity (5,563 tCO₂e), reduced production of banknotes (3,585 tCO₂e) and lower levels of business travel (2,583 tCO₂e). While emissions from business travel are expected to rise as the impact of Covid-related restrictions on travel diminishes, the Bank anticipates that it is unlikely to revert to 2019/20 levels due to new ways of working. The Bank’s move to a contract for the supply of renewable electricity is a permanent change and there is an expectation that it will continue to use renewable sources of electricity supply in future periods.

The majority of the Bank’s carbon footprint this year came from polymer substrate used in the production of banknotes (34%), natural gas usage (34%), and air travel (28%). Although gas usage will remain a key emission in the medium term, it has fallen significantly in the past year (by 29%) and the Bank is actively working to minimise emissions by taking steps to optimise gas consumption and exploring options for decarbonising its heating systems in the longer term.

The Bank has published its first CTP alongside this disclosure. It sets out the Bank’s approach to reduce carbon emissions from physical operations^{footnote [4]} to net zero by 2040 – the Bank’s PGGET.

The Bank is on track to meet its PGGET as well as its ‘2030 Target’ to reduce selected^{footnote [5]} GHG emissions by 63% from 2015/16 to 2030. Both targets align with the reduction in emissions needed to be consistent with limiting the rise in global average temperatures to 1.5°C above pre-industrial levels.

1: Governance

The Bank’s organisation-wide governance framework has been designed to be appropriate to the nature, scale and complexity of its operations. As a source of risk integral to the Bank’s mission, functions and operations, climate-related considerations are embedded in its approach to governance. This section sets out how the governance of the Bank’s climate-related work is applied.

Court of Directors’ oversight of the Bank’s management of climate-related risks

The Bank’s management of climate risks is overseen by its Court. Their role is supported by established responsibilities for climate matters, which have been allocated across the Bank’s executive committees, steering groups, and management team. Decisions are supported by regular management reporting on climate strategy, risk management, metrics and targets.

Acting as a unitary board, Court sets the Bank’s strategy and budget, and takes key decisions on resourcing and appointments. Court is responsible for matters that concern the Bank as an organisation, while policy responsibilities are reserved for policy committees. ARCo, a sub-committee of Court, assists Court in its responsibility for maintaining effective risk management, internal controls and financial reporting.^{footnote [6]} In line with these responsibilities, both Court and ARCo oversee the Bank’s approach to climate risk management and climate disclosure. This year Court has reviewed the Bank’s progress against climate risk targets as part of its reviews of this disclosure, the Bank's Climate Transition Plan (CTP) and the Bank’s Annual Report.

Executive-level committees are the most senior executive policymaking bodies beneath Court. They review and approve the Bank’s climate strategy at least once a year. In doing so, they ensure that the Bank’s climate strategy is focused on the aspects that may have the most material implications for the Bank’s statutory objectives for monetary and financial stability and is balanced against the Bank’s limited resources.^{footnote [7]} The strategy also takes into consideration the impact of climate change on the Bank’s broader remit, including recommendations from HM Treasury to each of the Bank’s policy committees. Further information on how the climate strategy is based in the Bank’s remit is set out in Section 2 and Annex 2.

The Bank’s three^{footnote [8]} statutory policy committees are the Monetary Policy Committee (MPC), the Financial Policy Committee (FPC), and the Prudential Regulation Committee (PRC). Each policy committee has a different set of responsibilities. Collectively, they discharge the Bank’s statutory functions in relation to monetary policy, financial stability and prudential regulation. All of the three policy committees discuss climate-related factors that are relevant to their respective objectives, as described in Section 2 and Annex 2.

Management’s role in assessing and managing climate-related risks

Governance of the Bank’s climate-related work at a management level is led by the Bank’s two Executive Sponsors for climate change: the Executive Sponsor for the Bank’s policy functions (Sarah Breeden, Executive Director for Financial Stability Strategy and Risk and member of the Financial Policy Committee); and the Bank’s Executive Sponsor for climate change across the Bank’s internal operations (Ben Stimson, the Bank’s Chief Operating Officer (COO)). The Executive Sponsors work closely together in order to deliver the Bank’s climate work.

Sarah Breeden has also been allocated the Senior Management Function responsible for the financial risks from climate change (SMF Climate) and is therefore responsible for recommending the Bank’s climate change strategy to the executive committees, overseeing its execution, and co-ordinating climate-related work across the Bank. Ben Stimson has responsibilities for climate risks to the Bank’s internal operations.

The primary management forum responsible for effective co-ordination on climate-related work across the Bank is the Executive Directors’ Climate Steering Group (EDCSG), which is chaired by Sarah Breeden as the SMF Climate. This group acts as a forum for executive directors across the Bank to discuss strategic climate-related issues and has been active in supporting Court and the Bank’s executive and policy committees in their work on climate change.

Oversight of the Bank’s physical operations carbon strategy is achieved via the executive committees responsible for operational matters, including operational investment, carbon emissions and performance. In line with these responsibilities, Court and the executive committees with an operational focus all have a role in the governance of the Bank’s strategy and actions related to carbon emissions and reduction efforts.

To embed consideration of climate change across the Bank’s functions, it operates a ‘hub and spoke’ model. At the centre sits the Climate Hub, a dedicated division of climate specialists, which supports the SMF Climate and implementation of the Bank’s climate strategy across the organisation. Each area of the Bank, or spoke, has one or more climate leads responsible for directing climate-related work within their area, and co-ordinating with the Climate Hub and across other spokes. This balances development of climate expertise with embedding consideration of climate risk across the Bank.

Figure 1.1: Organogram illustrating Bank committees and steering groups relevant to the governance of the Bank’s work on climate change ^{(a) (b) (c) (d) (e) (f)}

Footnotes

• Source: Bank of England.
• (a) While reserving certain key decisions to itself, Court has delegated to the Governor the day-to-day management of the Bank. The Governor delegates certain decisions to individuals or committees within the Bank and takes advice on others. The principal forums for such advice are the executive-level committees.
• (b) Ben Stimson is COO and Executive Sponsor for climate change across the Bank of England’s internal operations. He jointly signs off the Bank’s climate disclosure, together with the SMF Climate and Chief Financial Officer (CFO).
• (c) Sarah Breeden is Executive Director of Financial Stability Strategy and Risk, and Executive Sponsor for climate change across the Bank of England’s policy functions. She also holds the Bank’s Senior Manager Function responsible for the financial risks from climate change. Sarah jointly signs off the Bank’s climate disclosure, together with the COO and CFO.
• (d) Afua Kyei is the Bank’s CFO and is responsible for the Bank’s Annual Report. She jointly signs off the Bank’s climate disclosure, together with the COO and SMF Climate.
• (e) ARCo is a sub-committee of Court.
• (f) The EDCSG is a cross-Bank steering group to facilitate discussions on climate-related work. The EDCSG can make recommendations to, and review papers prior to going to, the Bank’s executive-level committees, ARCo, and other Bank committees where relevant. The EDCSG is not a formal Bank committee or decision-making body.

2: Strategy

The Bank’s approach to climate change

Climate change is relevant to the Bank’s mission^{footnote [9]} as the physical effects of climate change (eg sea-level rises and more frequent severe weather events) and the transition to a net-zero economy (eg changes in government policy, consumer preferences, and technology) create financial risks and economic consequences.

These risks and consequences can affect the safety and soundness of the firms the Bank regulates, the stability of the wider financial system, and the economic outlook in a way that could have a bearing on the appropriate monetary policy stance.^{footnote [10]} Reflecting this, responding to the challenge of climate change is one of the Bank’s seven strategic priorities for 2022 to 2025 (detailed in the Bank’s Annual Report).

The objective of the Bank’s work on climate change is to:

‘Play a leading role, through its policies and operations, in ensuring the financial system and the Bank itself are resilient to the risks from climate change and in understanding its macroeconomic implications. Where there is alignment with the Bank’s objectives and legal framework, it acts to support the transition to a net-zero emissions economy.’

The Bank builds this resilience by ensuring that climate-related financial risks are proactively identified and effectively managed through its supervisory and policy functions (eg its supervision of banks and insurers) and the Bank’s management of its own operations (eg the carbon footprint of its buildings, and the Bank’s market operations). The Bank also works to understand the macroeconomic implications of climate change on monetary stability. In doing so, the Bank’s work on climate change contributes towards advancing the ‘primary’ objectives of the Bank’s policy committees to maintain monetary and financial stability, and to promote the safety and soundness of persons authorised by the Prudential Regulation Authority (PRA).

In addition to the primary objectives, the Bank also has ‘secondary’ objectives which it works to advance to the extent that in doing so it does not undermine its primary objectives. The Bank’s work on supporting the transition to net zero aligns with its secondary objective of supporting the Government’s economic policy. The Government’s economic policy – and the Bank’s role in supporting this – is set out in the remits and recommendations that HM Treasury provides to the Bank’s three policy committees^{footnote [11]} – the MPC, the FPC, and the PRC. HM Treasury updated each policy committee’s remit and recommendations in 2022.

For further information on the Bank’s policy committees, the remit setting process, and a summary of the climate-related elements of the committees’ remits, please see Annex 2.

The Bank needs to use its limited resources in an efficient way, so focuses its work on those areas that may have the most material impact on its objectives. In setting the Bank’s climate strategy, the Bank prioritises those areas that might pose the most material risks to its primary monetary and financial stability objectives. In doing this it recognises that it is not possible to progress work in all areas, so, where relevant, strategic decisions focus on both where the Bank will and will not undertake work.

The Bank collaborates with a wide range of international and domestic stakeholders to undertake work and progress the collective understanding of the risks from climate change. This includes through the Network for Greening the Financial System (NGFS), international standard setters such as the Financial Stability Board (FSB), Basel Committee on Banking Supervision (BCBS) and International Association of Insurance Supervisors (IAIS), and broader stakeholder groups. Further information on some of the groups involved in this work are set out in the 2022 disclosure (Box A).

The Bank’s work to meet its strategic goals

The Bank’s climate strategy is built around five key goals. In April 2023 these goals were refreshed to reflect progress the Bank has made and broader shifts in the domestic and international climate agenda. The goals are set out in Figure 2.1.

Figure 2.1: The Bank’s five strategic goals for the current year and future periods

The Bank’s strategic work plan for 2023/24 has been developed around the new goals. The original goals underpinned the progress the Bank has made over the past year, which we report on in this disclosure. Below we discuss the progress made against the original goals over the last 12 months.

1. Ensuring the financial system is resilient to climate-related financial risks

The Bank is using its micro and macroprudential toolkits to build resilience to climate-related financial risks at both an individual firm and system-wide level.

In April 2019, the PRA became the first prudential regulator to publish a comprehensive set of supervisory expectations for how banks and insurers should enhance their approaches to managing the financial risks from climate change. Subsequently it has worked to help firms respond to those expectations,^{footnote [12]} setting a deadline for firms to embed them as far as possible by the end of 2021.

On 1 January 2022, the PRA’s approach switched from monitoring implementation to actively supervising against those expectations, and in October 2022 a letter to Chief Executive Officers (CEOs) provided thematic feedback on firms’ progress in responding to Supervisory Statement 3/19 (SS3/19). This included examples of observed practice, highlighting implementation practices that the PRA considered more and less effective, and reiterating that approaches should be proportionate to the nature of a firm’s business, scale of the risks, and the complexity of operations.

Overall, the PRA observed that, across the sector, banks and insurers have taken concrete and positive steps to implement the supervisory expectations. Levels of readiness and embedding vary, however, and the overall assessment of supervisors is that further progress is needed by all firms. The PRA continues to engage with firms as part of the supervisory cycle to support them in addressing the issues highlighted.

In parallel, the PRA has continued to promote high-quality and consistent accounting for climate change, particularly for banks, where there is a strong interaction between accounting and capital. In its letter to CFOs sharing thematic findings from its review of written auditor reports for major UK banks, the PRA communicated feedback on observed firm practices and a list of ‘key plan elements’ to help banks plan to improve the capture of climate risk on their balance sheets.

The Bank published the results of the 2021 CBES exercise in May 2022. The findings indicated that an ‘early action’ scenario, where policies are introduced in a timely manner to deliver an orderly transition to net zero by 2050, resulted in the lowest costs and greatest opportunities for the financial sector. Other scenarios, where climate risks are higher due to late action or disorderly transition, bring greater costs for the financial sector and greater potential costs for the real economy, including through the withdrawal or increase in price of financial services to certain businesses and households.^{footnote [13]} Supervisors have engaged with participating firms to provide individual feedback and support them in development of their capabilities in this area.

Building on the Bank’s initial findings on the relationship between climate change and regulatory capital requirements for banks and insurers, which were published in the PRA Climate Change Adaptation Report 2021, this year the Bank explored whether changes need to be made to the design, use or calibration of the regulatory capital framework. The Bank hosted a research conference on climate change and the regulatory capital framework in October 2022 and published a report in March 2023. The PRA also reviewed firms’ own assessments of their climate-related capital needs in banks’ Individual Capital Adequacy Assessment Plans and insurers’ Own Risk and Solvency Assessments, feeding back to banks and insurers via the letter to CEOs published in October 2022.

The PRA continues to work jointly with the Financial Conduct Authority to convene the Climate Financial Risk Forum (CFRF), an industry group established to share best practice on climate issues and accelerate firms’ capabilities to address climate change. This year the CFRF published a series of climate-related practical guides and toolkits, which build on their earlier work.

There is also increasing discussion of the potential for changes in the environment beyond those directly attributable to climate change to create financial risks. For example the NGFS supported research^{footnote [14]} and established a task force on ‘Biodiversity Loss and Nature-related Risks’^{footnote [15]} to explore ‘nature-related financial risks’ such as biodiversity loss. In line with the FPC’s remit and recommendations letter, in the July 2022 Financial Stability Report they considered the potential relevance of other environmental risks to their primary objective. They concluded that collective understanding of how nature risks could give rise to financial risks is in its infancy globally. The Bank should therefore seek to build its understanding of how environmental risks might give rise to financial risks and consider the potential materiality for UK financial firms and the UK financial system, drawing on others’ work as appropriate. To that end, to improve its understanding of nature-related risks, the Bank is engaging with the Green Finance Institute, the Department for Environment, Food and Rural Affairs and partners to better size the potential UK financial exposures from nature loss and degradation. This project was launched in April 2023.

2. Supporting an orderly economy-wide transition to net-zero emissions

The primary levers for driving an orderly economy-wide transition to net-zero emissions rest with UK Government in setting climate policy. Clarity over the future path of climate policy and implications for different sectors will better allow the UK economy to adjust effectively, and the financial system to support that adjustment, reducing the risks of a later, sharper, and more disorderly transition. However, the Bank’s actions to ensure a resilient financial system can in some circumstances catalyse and amplify the effects of UK Government climate policy and support the transition to a net-zero economy.

One of the Bank’s primary roles in the transition to net zero is to understand how different transition pathways could affect the macroeconomy, the stability of the wider financial system, and the safety and soundness of the firms it regulates. Consistent with its financial stability strategy, the Bank aims to ensure that the financial system can facilitate and support vital financial services that the economy requires during the transition to net zero, which contributes to this transition being orderly. The Bank’s policy response will be calibrated to address the risks that these pathways pose to its objectives.

As noted above the CBES has provided significant insights on the interplay between transition paths and the build-up of financial stability risks. Following this, the Bank is investing in work to determine how to monitor these risks better over time, including the framework and tools that would be required to support that. This will be an area of increased focus going forward and one that the FPC will be regularly updated on.

This year the Bank has supported UK Government as it developed its 2023 green finance strategy. The Bank has have also supported the team that produced the Review of Net Zero; an independent review of the Government’s approach to delivering its net-zero target.

The Bank stepped down as chair of the Macrofinancial workstream of the NGFS, passing the role to the European Central Bank. Over the past four years, while chaired by the Bank, the Macrofinancial workstream has developed a set of reference climate scenarios that have been used by central banks and policymakers around the world.^{footnote [16]} Although the Bank’s tenure as chair of the Macrofinancial workstream ended in 2022, it has continued to be an active participant in the NGFS workstream on Scenario Analysis and Design. In the coming period, this workstream will further develop the scenario toolkit that can be used to develop cross-economy understanding of how climate risks might arise, including over short time frames.

In May 2022, James Talbot (Director of the International Directorate at the Bank) was appointed Chair of the NGFS workstream on Monetary Policy, which focuses on understanding how climate change and climate policies should be considered in relation to the conduct of monetary policy. The workstream began its work by surveying members to understand the extent of their progress and efforts to date on macroeconomic analysis supporting monetary policy formulation and monetary policy operations. Insights from the survey are shaping the workstream’s analytical work and the Bank is considering how they might also inform its internal thinking on monetary policy in the context of climate change.^{footnote [17]}

The Bank has also undertaken work to explore the macroeconomic implications of climate change. In October 2022 an article was published in the Quarterly Bulletin, which set out the Bank’s initial thinking on the possible macroeconomic implications of climate change.

The Bank anticipates that individual and sector-level transition plans will assist its role as both a central bank and a financial regulator to identify the risks to firms and insurance policyholders and at the macro-level the systemic risks that may impact the economy as a result of the transition. To that end the Bank continues to be an active observer on HM Treasury’s Transition Plan Taskforce (TPT), which is helping to define the standards for transition plans by establishing robust criteria and the effective use of science-based targets. In November 2022, the TPT published: a summary of their key recommendations for producing a transition plan; a sector-neutral framework for developing gold-standard transition plans; and implementation guidance.^{footnote [18]}

3. Promoting adoption of effective TCFD-aligned climate disclosure

The Bank has supported the adoption of the climate disclosure framework established by the Task Force on Climate-related Financial Disclosures (TCFD) since its inception, including guidance for central banks published by the NGFS.^{footnote [19]} Climate disclosure is important not only for transparency and for risk management purposes, but also as a way to enable the flow of capital towards investments that are consistent with an orderly cross-economy transition to net-zero emissions. Consequently, climate disclosure is also integral to the UK’s legislative commitment to reach net-zero emissions by 2050.

The Bank is supporting the UK Government and other financial regulators in the rollout of mandatory TCFD-aligned climate disclosure requirements across the economy by 2025.^{footnote [20]} When implemented, these requirements would be complemented by the PRA’s existing supervisory expectation that banks and insurers should report their climate-related financial risks as part of their public climate disclosures, and where material in their Pillar 3 regulatory disclosures. The wider rollout of climate disclosure requirements are being delivered through a combination of regulations and legislation, as described in the UK Sustainability Disclosure Requirements.

Climate risks are global and therefore the implementation of high quality, comparable and consistent climate disclosure standards across jurisdictions is vital for supporting and promoting the identification, measurement and management of climate risks. In light of this need, the Bank continues to support multilateral work to establish a global baseline for climate risk reporting, for example the work of the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB). On 26 July 2023, the ISSB issued its inaugural sustainability standards, IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures). The Bank is supportive of the call made in the Net Zero Review for the UK Government to endorse and implement the ISSB standards as soon as possible.

Internationally, the Bank advocates for interoperability between global climate disclosures standards and is contributing to the BCBS’s Task Force on Climate-related Financial Risks’ (TFCR) development of the Pillar 3 disclosure framework for climate-related financial risks. The framework is intended to complement, and be interoperable with, parallel disclosure initiatives under way by the ISSB and other authorities and is expected to be issued for consultation by the end of 2023.

4. Working towards a timely and co-ordinated international approach to the assessment and management of risks to monetary and financial stability from climate change

The consequences of climate change are global. Therefore, the effectiveness of climate policy and the need for a robust understanding of climate risks and impacts are not solely domestic concerns. They must be delivered in a co-ordinated and timely fashion at an international level. Where international collaboration on climate policy aligns with the Bank’s primary objectives of maintaining monetary and financial stability, the Bank engages with other central banks through its roles in international fora, and by working with the UK Government to deliver progress on climate, including through the G7 and G20.

The Bank is a founding member of the NGFS and sits on its steering committee. By February 2023 the NGFS had grown from eight central banks in 2017 to 121 members and 22 observers – representing countries responsible for more than 85% of global greenhouse gas (GHG) emissions and responsible for supervising all global systemically important banks and 80% of the internationally active insurance groups. Through the NGFS the Bank aims to share its own experience, learn from others, and promote consistent and effective responses to climate risks by central banks and supervisors across the world. As noted above, the Bank currently co-leads the NGFS’s work on transition plans and chairs the NGFS workstream on Monetary Policy, which aims to progress understanding of how climate change and related policy responses should be considered in relation to the setting and operation of monetary policy.

The Bank provides training to other central banks and regulators on topics including climate-related financial regulation through the Bank’s Centre for Central Banking Studies (CCBS). In 2022, with support from the UK Foreign, Commonwealth and Development Office, the CCBS engaged with Central Bank of Egypt, the Bank of Ghana (alongside 15 West African central banks), Bank Indonesia (alongside eight ASEAN^{footnote [21]} central banks) and the South African Reserve Bank (alongside sixteen central banks in the region). Specifically, the CCBS provided training on microprudential supervision of climate risks, climate scenario analysis, and climate disclosures as well as convened roundtable discussions on climate risks in these countries.

The Bank participates in the IAIS Climate Risk Steering Group to support insurance supervisors in developing their own scenario analysis, to integrate data collection, and to explore climate-related amendments to the Insurance Common Principles. Victoria Saporta, Executive Director of Prudential Policy at the Bank, is chair of the IAIS. The Bank also co-founded the Sustainable Insurance Forum (SIF)^{footnote [22]} to advance supervisory responses to climate change in the insurance sector across the globe.

The Bank also works closely with HM Treasury to represent the UK in key international fora including in the G7 Finance Track and the G20 Sustainable Finance Working Group (SFWG). Through the SFWG, the Bank is helping to deliver against the G20 Sustainable Finance Roadmap published in 2021, seeking the implementation of the transition finance framework developed in 2022, and supporting efforts on mobilising private finance and capacity building.

In addition to these climate-focused fora, the Bank continues to engage in the climate-related workstreams of standard setters and international bodies. For example, engagement included, but was not limited to:

• The BCBS’s TFCR’s work on identifying the gaps within the Basel framework and potential measures to better capture climate-related financial risks, includes not only the disclosure work referenced above, but also regulatory and supervisory elements. It is also a key forum through which the Bank will advance discussions internationally on its research into the relationship between climate change and regulatory capital requirements.
• The FSB’s Standing Committee on Supervisory and Regulatory Cooperation, chaired by the Bank of England’s Governor, published: its final report on supervisory and regulatory approaches to climate risks;^{footnote [23]} a joint report with the NGFS drawing lessons for effective scenario analysis based on various national and regional exercises performed by financial authorities;^{footnote [24]} and a progress report on climate-related disclosures, reviewing the actions taken by the ISSB in developing the global minimum baseline disclosure standards as well as by individual jurisdictions and firms in improving climate-related disclosures.^{footnote [25]}
• In March 2022 the FSB set up the Climate Vulnerabilities and Data Group under the Standing Committee on Assessment of Vulnerabilities. The group aims to develop a framework and an analytical toolkit for assessing climate risks to financial stability, globally, by identifying and improving the use of existing metrics and data as well as considering how assessments can be enhanced in future. From June 2023, Sarah Breeden (Executive Director for Financial Stability Strategy and Risk and member of the Financial Policy Committee) took on the role of chair to drive the work forward.
• Through the Organisation for Economic Co-operation and Development, the Bank contributed to high-level principles for climate transition-relevant finance and is contributing to work to develop a framework to use transition plans to track progress against financial sector net-zero commitments.

5. Demonstrating best practice through the Bank’s own operations

The Bank holds itself to the same climate-related standards that it expects of the firms it regulates and the financial system it oversees. As such, the Bank is taking steps to ensure its own operations conform to best practice in the measurement, management and mitigation of climate risks. This includes reducing emissions from the Bank’s physical activities (such as its buildings, production of banknotes, and travel) and reporting on climate risks relevant to its financial market operations. The Bank mitigates the climate risks to its financial operations to the extent possible without adversely affecting its core public policy objectives of monetary and financial stability. The Bank has considered how its approach to its own operations, where relevant, maps to the supervisory expectations it has set for PRA-regulated banks and insurers (as set out in Table 2.A).

This year the Bank has developed its first CTP, setting out its approach to reducing emissions from physical operations to net zero by 2040. In preparing the CTP the Bank has aligned its work to the TPT framework and guidance issued for consultation in November 2022.

3: Risk management, metrics and targets

The Bank has a risk management framework that spans all of the Bank’s functions. The risk management framework specifies the Bank’s risk tolerance for financial and non-financial risks. It is underpinned by an internal classification of risk types (a risk taxonomy), which all areas of the Bank use to categorise their risks.

Within the risk taxonomy, the Bank identifies a small number of ‘Key Risk Types’, which are overseen by a named ‘Risk Custodian’. The Risk Custodian for climate change risk is Sarah Breeden, one of the Bank’s Executive Sponsors for climate change and SMF Climate. Risk Custodians, supported by the Bank’s second line risk function, are responsible for defining a set of risk metrics and tolerances; monitoring and reporting them and, where appropriate, co-ordinating the timing and implementation of mitigants.

The Bank’s climate risk metrics aim to capture the full range of climate risks to which the Bank is exposed. They are reviewed periodically, reflecting the pace of development in the field and frequency of reporting of underlying data. Over the past year, work has been undertaken to update the metrics to reflect the Bank’s new Physical Greenhouse Gas Emissions Target (PGGET). The Bank will start reporting on the new metrics in June 2023.

The Bank uses its risk management framework to monitor exposure to climate risks and to assess how those risks could impact the resilience of its financial and physical operations. To help analyse climate risks in both these areas, the Bank focuses on the potential financial and non-financial impacts emanating from two climate risk drivers:

• physical risks relating to both specific weather events and to longer-term shifts in the climate; and
• transition risks arising from the adjustment towards a carbon-neutral economy.

These risks are assessed across the near-term horizon, through regular Risk and Control Self Assessments prepared by each of the Bank’s key functions. They are also assessed through the climate risk metrics, and, for risks which are more uncertain or less proximate, through regular analysis of emerging risks.

The Bank’s approach to risk management is influenced by three distinct characteristics, which the Bank sees in both transition and physical climate risks, and which mean that addressing climate risks presents unique challenges:

• The impact is far-reaching in breadth and magnitude: climate change risks will affect all parts of the economy and society, across all sectors and geographies. The risks will be correlated and their impact nonlinear and irreversible.
• Many of the risks are foreseeable: while the exact outcome is uncertain, some combination of transition and physical risks will crystallise.
• The magnitude of the future impact is dependent on actions today: this includes actions by governments, central banks and regulators, financial firms, businesses, and households.

While these three characteristics mean that climate risks present unique measurement and management challenges, the Bank recognises that delay in taking action will impair its ability to both measure the risks the Bank is taking in the short term and assess the long-term consequences of those decisions. As such, the Bank is taking a forward-looking approach to climate risk management and is prioritising development of the necessary skills and knowledge to manage risks as they develop.

The process for managing risks related to climate change will continue to develop as the Bank’s understanding of underlying risks improves, technical capabilities are enhanced, and methodologies evolve and become more standardised.

The remainder of this section sets out the key climate risks the Bank has identified to its financial and physical operations.

Key climate-related risks in the Bank’s financial operations

The Bank engages in a range of market operations for the purposes of achieving its monetary policy and financial stability objectives, and – to a much smaller degree – funding its wider activities. This includes purchasing sovereign and corporate assets and offering secured lending to counterparties. As part of managing the financial risks involved in this secured lending, the Bank manages a wide range of collateral. The full range of the Bank’s policy and balance sheet tools are set out in the Bank of England Market Operations Guide.

As in previous years, the largest proportion (97%) of the Bank’s financial assets is held in a separate legal vehicle known as the Bank of England Asset Purchase Facility Fund, indemnified by HM Treasury, to implement the MPC’s asset purchase programme. Sterling UK Government bonds (gilts) represent 99% of that portfolio. The remaining 1% is currently invested in sterling corporate bonds as part of the CBPS.

Both sovereign asset holdings and CBPS holdings in the Asset Purchase Facility (APF) decreased in 2023, reflecting the MPC’s monetary policy decisions. The CBPS is being unwound through a programme of not reinvesting the proceeds from maturing bonds and selling corporate bonds.^{footnote [26]} APF gilts are also being allowed to mature, and a sales programme is under way.^{footnote [27]}

As in previous years, the analysis in this climate disclosure covers assets that have a maturity of more than 12 months and excludes the Bank’s secured lending operations (see Box A for a discussion of risks around the Bank’s collateral). Consistent with the Bank’s 2022 disclosure, the climate disclosure related to the Bank’s staff pension fund is reported separately.^{footnote [28]}

In its first disclosures, the metrics the Bank considered to assess climate risk were largely backward-looking, point in time metrics such as carbon intensities. However, climate-related financial risk management remains a rapidly developing field, and the Bank’s approaches are continuously being refined as data and methodologies develop.

For climate risk metrics to become decision-useful from a financial risk management perspective, they need to be forward-looking and expressed in quantitative terms which can be incorporated into existing financial risk frameworks. In simple terms, this means transitioning from ‘proxy’ metrics which indicate relative risks (such as carbon intensities), to metrics which help quantify financial losses in different scenarios.

For this reason, the Bank is continuing to deepen the range of forward-looking scenario-based analyses it uses to assess the financial impact of transition and physical risks and moving forward with incorporating these into its risk frameworks (see Figure 3.1). Given that many methodologies are still evolving, the estimates are highly uncertain. But the analysis can still provide useful insights and inform future work with respect to managing climate-relate risks in its financial operations. The data and metrics section provides further detail on the different types of metrics included in the report.