The Role of the Bank of England in Managing Climate Risks in the UK Property Market

The UK banking system has historically played a crucial role in strengthening the property sector and promoting economic stability through secure lending mechanisms like mortgages and overall financial resilience.

However, climate change has emerged as a significant challenge due to the growing frequency of its events and the magnitude of its damages, particularly affecting physical assets and their pricing over time.

The Bank of England (BoE), recognising the urgency of addressing these risks, has a pivotal role in managing and mitigating climate-related threats that could destabilise the property market.

As the UK’s central bank, the BoE has implemented key actions and has made progress to integrate climate risk considerations into its financial stability framework, albeit facing continuing constraints related to the collection of forward-looking climate information.

In this article, we examine these actions, their impacts on the property market, and explores opportunities to enhance these measures to ensure long-term economic stability and resilience in the face of climate change.

“Getting our core job right, and so maintaining financial stability, is far and away the most important thing we can do to support the fight against climate change” – Sam Woods, CEO of Prudential Regulation Authority (PRA), Bank of England.

The property market in the UK faces numerous climate-related threats, including increased frequency and severity of flooding, rising sea levels, and temperatures, that lead to significant financial losses by affecting property values, insurance costs, and mortgage stability.

For instance, Green Finance Institute reports that annual damages from flooding in England could increase to an estimated £2.2 billion by 2050 if current climate trends continue, with risks of river and surface water flooding for residential properties projected to increase by 137%, while risk for non-residential properties could reach 36% by 2050.

To combat these risks, the Bank of England has implemented a series of measures aimed at integrating climate considerations into its financial stability monitoring and policy frameworks:

One of the key actions taken by the BoE is the incorporation of climate risk assessments into its stress testing of banks and insurers.

By evaluating the potential impacts of various climate scenarios, the BoE ensures that financial institutions are better prepared to manage and mitigate these risks and recommends the property sector on key considerations when developing adaptation measures to address potential financial losses.

The 2021 Climate Biennial Exploratory Scenario exercise (CBES) findings indicate that around 7% of UK households, approximately four million, could lose access to home insurance under a scenario where global governments fail to implement policies addressing global heating, noting that estimated losses to climate change impacts could reach £330 billion.

Climate-related losses would be concentrated in specific areas, such as flood zones where households would also face declining home values and difficulties in remortgaging their properties.

In this regard, The BoE suggests that lenders model loan affordability by considering both energy efficiency improvements and potential energy price increases. Additionally, property valuations should be routinely reassessed following physical climate risk events.

In addition, the BoE has been actively promoting the importance of climate-related financial disclosures, encouraging greater transparency and accountability in how financial institutions manage climate risks.

Increasing transparency can lead to better investment decisions and risk management, enhancing the property market's resilience to climate impacts.

In July 2023, the Bank published a TCFD-based climate financial disclosure and later that year began transitioning its climate disclosure strategy to align with ISSB standards, aiming to refine its approach and advance its transition plan.

This is also useful to provide a global baseline for sustainability-related financial disclosures, including climate-related risks, ensuring that financial institutions and property market stakeholders have access to consistent and comparable information on climate-related financial risks.

“Collectively we need to equip the financial sector with forward-looking information from the real economy to allocate capital effectively and mobilise finance at scale.” – Sarah Breeden, Deputy Governor for Financial Stability, Bank of England.

Despite these efforts, the BoE continues to face challenges to enhance its strategy.

These constraints mainly revolve around the access to forward-looking data on climate impacts. However, this situation also presents opportunities to refine existing approaches to these challenges.

As far as improving data collection and analysis related to climate impacts on the property market is concerned, the Bank of England could improve the following areas to better coordinate industry work in ways that benefits the UK property market:

• Enhance Collaboration: Facilitate greater collaboration between insurers, banks, and climate risk data providers. This could involve creating platforms or forums for sharing data, insights, and best practices related to climate risk assessment.
  In turn, this can lead to a comprehensive understanding of climate risks, enabling the development of joint strategies to safeguard properties against climate-related damages.
• Promote Data Standardisation: Encourage standardisation of climate risk data formats and metrics across the industry. This simplifies data exchange, improves comparability of assessments, and enhances overall reliability of risk analyses.
  Standardised data allows for seamless integration into various analytical models, providing a clearer picture of potential climate impacts on properties and aiding in the development of appropriate adaptation measures.
• Incentivise Data Quality: Provide incentives for insurers and banks to invest in high-quality climate risk data. This might include subsidies for acquiring data from reputable providers or recognition programs for institutions that demonstrate excellence in data collection and analysis.
  High-quality data leads to more accurate risk assessments, allowing for better-informed investment decisions and policy-making that can minimise climate-related financial losses in the property sector.
• Support Innovation: Foster innovation in climate risk data analytics by funding research and development initiatives. This could involve partnerships with academic institutions and technology firms to explore advanced modelling techniques and predictive analytics.
  Investing in new analytical methods can lead to breakthroughs in predicting and managing climate risks, potentially reducing the vulnerability of properties to climate change and preserving their value.
• Regular Review and Updates: Improving mechanism for regular review and updates of data collection practices and methodologies. Climate risk is dynamic, so ongoing refinement of data collection approaches ensures relevance and accuracy in assessing property market vulnerabilities.
• Role of Climate Risk Data Providers: Recognise the critical role of climate risk data providers in supplying accurate and timely data. In this sense, partnerships with providers such as Climate X could ensure access to reliable resources and enhance data availability and quality, which is crucial for accurate risk assessments and effective climate adaptation strategies.