Leading the way to carbon zero: an interview with the Bank of England’s Sarah Breeden

17 Mar 2020

Leading the way to carbon zero: an interview with the Bank of England’s Sarah Breeden

As the Bank of England’s Sarah Breeden explains, reaching zero carbon emissions within the decade is an enormous undertaking, requiring leaders focused on a strategic view of managing risk.

Anne Murphy, Head of Odgers Berndtson’s Financial Service Practice in London, continues her conversation with the Bank of England’s Executive Director for UK Deposit Takers Supervision, who has oversight of the Bank’s work enhancing the financial system’s resilience to climate change. A video of this interview is available here.

Anne Murphy: How are the central bank and other supervisory expectations changing around climate? How is the UK doing versus some of the other jurisdictions around the world?

Sarah Breeden: Well, one of my favorite statistics about central bank supervisors and climate change is that just two years ago the Bank of England was one of eight founding members of a central bank and supervisor's network: the Network for Greening of the Financial System.

Just two years ago we had eight members - now we have 54. An incredible change over a relatively short period of time.

That really does highlight the increasing awareness of these issues amongst the central bank and supervisory community.

Obviously, we started on this journey earlier than others. When you supervise the Lloyd's insurance market, it's an obvious risk to be aware of and on top of.

My sense is that other central banks and supervisors are increasingly becoming aware of these risks and are catching up fast, which is, of course, necessary because this is a global problem that requires global solutions.

AM: What examples are you seeing of good practice from financial institutions?

SB: The financial institutions best at managing these risks are the ones that take a strategic view. They're not just thinking about how these risks are crystallizing now.

What the more sophisticated institutions are doing involves looking out over a number of decades and thinking about how their actions today are leading to future financial risks.

What they're doing is working with their corporates, their customers, to better understand whether they're on a path to net-zero, or, if they're a high carbon emitter now, supporting them through finance as they make that transition.

Having a long horizon and being strategic would be the two things that I would highlight.

A specific example might be, in the credit analysis they do, making sure that they ask these questions of their corporate and consumer customers:

How exposed to these risks are you? Have you got a plan to change your business?

When they do take a view on the credit risks associated with the answers they get, the next step is to embed that into all their future thinking. For example, what is the exposure to a carbon price of a particular corporation, and how is that going to affect their investment and lending decisions to that company?

AM: Can financial institutions learn from other types of companies?

SB: Many companies in the real economy have been dealing with these risks for years.

They look at a range of possible future states of the world and think about how investments pay off in each of those and make an informed investment decision accordingly. That kind of analysis is exactly what we want banks, insurers, and investors to do.

AM: Much of the work that we do at Odgers Berndtson is focused on leadership and identifying leaders for a range of institutions. What can leaders of financial services businesses do individually?

SB: Leaders are really important to this. If I think about the Bank of England, it's the leadership of Governor Carney that's put climate change on our agenda, and we have been focused on that issue because of his interest in that.

Leaders should be very clear that they think this is a risk, make somebody accountable for thinking about it, incentivise them through remuneration to do the job well, provide them with the resources that they need to do it.

And importantly, set a strategy, a risk appetite if you like, for how they're going to manage this risk, and monitor progress against it.

There's a really nice metric that you can use to think about the pathway that you are on as a company or as a bank.

Given our current carbon emissions and given our known plans to change them, what is my contribution to the temperature of this world?

It might be two degrees, or it might be three and a half. If it is three and a half degrees and you want to get to two degrees, what are the actions that you are going to take? Leaders can then set a strategy to get from three and a half to two, and monitor progress, year by year, as you get there.

It's just a nice simple metric that shows where you want to get to and how you can monitor progress to get there.

AM: What do you think the key things are for the next, let's say, three to five years, that we need to think about?

SB: We need to undertake such an enormous change over the next three to five years. Many people think climate change is a risk for the future. Well, the climate scientists tell us it's a risk for the next five years because it's what we do over the next decade that will determine the pathway that we are on.

To have a two-thirds chance of getting to a two-degree world over the next ten years, we need to have a peak in carbon emissions next year. Let's be clear, they've been going up and up and up. So we need to stop that next year and have them fall over the next 10 years at twice the rate of which they have increased over the previous 10 years. That's a big change for us all to make.

If there's one thing I want leaders to be focused on, it’s how do we peak our carbon emissions, how do we get them going down, and how do we get them falling at a rate that is faster than the rate at which we have been increasing?

AM: Thank you, Sarah, we’ll get further into that in the next part of this interview.