Former Bank Staff Criticise BoE for Weak Focus on Climate Risks

Several former BoE officials have responded with alarm to what they characterize as a deprioritisation of climate- and nature-related financial risk under the watch of current Governor Andrew Bailey. The allegations indicate that Britain's central bank is not managing the most critical environmental risks that would influence the financial system properly. The Bank has denied the allegations, stating climate risks remain within its broad financial stability framework.

In line with reports, a few of the top executives who departed the BoE during 2020-2024 have accused the institution of watering down its commitment to incorporate environmental risks into central financial supervision. According to them, the Bank has watered down its concern for issues such as biodiversity losses, crop failure, water shortages, and more general climate-related dislocation that potentially pose unmitigated risks to the UK financial system.

The Bank of England responded to these allegations by asserting that climate risk remained within its remit, specifically financial stability. It explained that although climate policy comes under the remit of the UK government, the remit of the BoE includes ensuring risks that would influence its financial goals, including environmental risks.

The concerns follow a reported slowdown in activity since the previous major climate stress test conducted by the BoE in 2021–2022. The test also attempted to determine how the financial system would react to different climate states and estimated an 10–15% fall in profitability for insurers and banks under some circumstances. The stress test was anticipated to be held every two years but has not been replicated since. Some former staff cited this exclusion as proof of declining interest in the management of climate risk.

Adding to the problem, the BoE's internal rule might have been politically motivated. In 2023, then-Chancellor Jeremy Hunt omitted climate change from the Bank's official list of government reporting priorities. This update to government policy might have reflected on the extent to which the BoE has become involved in climate finance and sustainability issues.

BoE contends that it remains committed to the UK's Green Finance Strategy and the development of transition finance tools. They are intended to accelerate the nation towards adopting a low-carbon economy. However, critics contend that without frequent stress testing and firm inclusion in financial supervision procedures, the efforts will not place the industry in adequate readiness for future environmental shocks.

Deputy Governor Sarah Breeden said the Bank needs to focus on its core mission of providing financial stability. It is the political government, and not the central bank, that ought to set net-zero directions, she added. Governor Bailey, meanwhile, admitted in February 2024 that climate change presents a threat to financial stability but conceded that the level of the BoE's activity in the field had been diminished.

The criticism is pointing to a major contradiction between banks and climate goals. Increased scrutiny is being directed towards how the central banks, policy-makers, and regulators manage long-term environmental threats. The world's financial systems are being asked to prepare and respond to climate disruption, but this will involve ongoing monitoring, open policy co-ordination, and the incorporation of climate science into economic projections.

Some of the staff at the BoE are reported to have resigned in disillusion with reduced interest among the bank in environmental risk, although some have pursued alternative career pathways. Critics of the strategy argue that excluding or omitting climate threats from traditional analysis demotes the gravity of such risks and could also undermine future resilience.

With climate responsibility controversies in financial regulation on the rise, institutions such as the BoE are coming under mounting pressure to ensure that their frameworks accurately capture pending risks. This requires crafting long-term approaches to reconciling financial regulation with climate realities even when political and administrative interests change.

The result of this debate will determine the UK's future in global sustainable finance. If this fear of underpreparedness continues, there may be wider repercussions on investor confidence, regulatory confidence, and the efficacy of national climate adaptation policies in finance.

While the BoE continues to say it encompasses climate risks within its strategic remit, the absence of recent experimentation and internal critique has led to fresh questions around the coherence and effectiveness of its strategy. Financial and environmental stakeholders will be looking to see if the Bank returns to an active strategy or continues with its more recent, less militant approach.

Source: BusinessGreen, KnowESG