Given this combination of immediate physical risks and prospective transition risks, the Bank of England has become increasingly active consistent with our financial stability and prudential mandates. In 2015, we examined the impact of climate change on the UK insurance industry.6 General insurers and reinsurers are on the front line of managing the physical risks from climate change, and they have responded by developing their modelling and forecasting capabilities, improving exposure management, and then adapting coverage and pricing accordingly. One of the lessons they have taken on board is that yesterday’s tail risk is closer to today’s central scenario. Sadly, with respect to climate, history repeats not as farce but as tragedy, with growing frequency. Despite the sophistication of insurers, there are some gaps in their risk management. The Bank is increasingly focused on cognitive dissonance in some insurers whose careful management of climate risks on the liability side of their balance sheets is not always matched by similar considerations on the asset side. With that in mind, we expect firms to consider stress testing and scenario analysis as part of their assessment of the impact of climate risk on their balance sheet and broader business strategy. This will also be reflected in our own market-wide insurance stress test exercises. For banks, the financial risks from climate change have tended to be beyond their planning horizons.
The TCFD delivered – to the Hamburg G20 Leaders’ Summit last year – final recommendations for voluntary disclosures of material, decision-useful climate-related financial risks.9 Suitable for use by all companies that raise capital, the recommendations:   Include disclosure of governance, strategy and risk management;    Establish consistent and comparable metrics and targets applicable across all sectors, as well as specific metrics for the most carbon-intense industries;    Encourage use of scenario analysis in order to assess the potential impact of the risks and opportunities of the transition to a low carbon economy on strategy and financial planning. The combination of the Paris Accord and the TCFD has led a clear transition in thinking and action about climate-related financial risks. Consider the changes in demand, supply and impact of climate disclosure. The demand for climate-related financial disclosure from the providers of capital has increased significantly. Current supporters of the TCFD include three-quarters of the world’s globally systemic banks, 8 of the top 10 global asset managers, the world’s leading pension funds and insurers, major credit rating agencies, the Big Four accounting firms, and the two dominant shareholder advisory service companies. These financial firms are responsible for managing nearly $ trillion in assets (or 20% more than global GDP). With climate-related shareholder resolutions tripling last year and litigation risks rising, the incentives for companies to disclose and manage climate-related risks have increased dramatically. Not surprisingly, the supply of climate disclosure is responding.