The risks posed to banks’ solvency would remain high even if a robust deal was reached at the UN climate change summit in Paris over the next fortnight, said Joss Garman, a co-author of the IPPR think-tank report.
Financial institutions are threatened with climate-related losses on several fronts. Banks and pension funds stand to lose billions of pounds of loans and investments in fossil fuel companies if, as seems increasingly likely, they have to leave huge amounts of their coal, oil and gas assets in the ground.
Local-authority pension funds alone are understood to hold £14bn of fossil fuel assets, while 19 of the FTSE 100 list of the biggest companies are in the natural resource and extraction business, according to the report, co-written by the IPPR’s director of strategy and engagement, Diana Fox Carney, the wife of Bank of England Governor Mark Carney.
Meanwhile insurance companies face huge payouts as global warming increases the frequency and severity of floods and storms. And the rise in extreme weather will hit the economy well beyond the financial services sector as uninsured losses hits businesses and households – for example ruined crops and damaged buildings.
A thorough examination of financial institutions’ balance sheets, to determine their exposure to precarious fossil fuel investments and insurance liabilities, could help to avert a huge crisis further down the line by identifying where the weaknesses were and attempting to remedy them, Mr Garman said.
“Modelling techniques pioneered in the insurance industry could enable the risks to be disclosed to investors and would make it possible to stress-test banks, pension funds and listed companies against different climate change scenarios,” he said. “This would expose where investments could be vulnerable to financial losses. MPs should consider mandating stress-testing of this kind because ultimately it could help us to avoid another financial crisis.”
