Saturday, 22 December 2018

Should banks take climate risks into account?

The latest article (at the time of writing) from the New Economics Foundation is “Greening the Banks” by Frank Van Lerven.

The article claims “Climate change has the potential to wipe out trillions of pounds worth of assets, making the devastation of the 2008 Global Financial Crisis seem like a walk in the park.” That is followed a few sentences later by “This poses severe financial risks…”.

Er  - no I don’t think it does. Reason is that climate change is coming sufficiently slowly that no bank is likely to be caught out by those risks. To illustrate, central London may well be flooded and have to be evacuated at some point, and clearly that will involve a huge loss in the value of assets which back bank loans, e.g. houses and office blocks. But that flooding, according to climate scientists, will not happen SUDDENLY: e.g. by this time next year. It will take around fifty or a hundred years to materialise. 

Of course it could be argued that there are LESS PREDICTABLE risks arising from climate change than the latter flooding. But if the extent of a risk cannot be predicted, it’s a bit difficult, by definition, to quantify it!

The NEF article also considers the loss in value of assets in the form of a contraction of the fossil fuel industry. Well if governments WERE TO significantly contract those industries, and that certainly needs doing, it would be daft to try to do it all in one or two years. I.e. a minimum of about five years would make more sense.

In that case, again, banks have time to adjust.

Penalise dirty lending?

Next, under the heading “Penalise Dirty Lending”, the article proposes extra capital requirements for bank loans which fund CO2 emitting activities. Well the obvious problem there is that extra capital requirements involve little extra expense for banks. Indeed, if the Modigliani Miller theory is right (at least as it applies to banks) there is no extra expense at all!!

Certainly any extra expense via the latter means will be MINUTE compared to the extra expense for motorists that derives from tax on petrol and diesel. Tax accounts for around 65% of the price of petrol and diesel for motorists in the UK at the moment. That dwarfs any extra costs that might be loaded onto “dirty lenders” and CO2 emitters via the capital requirement method.


Something urgently needs to be done about global warming. But there are effective ways to solving that problem and ineffective ways. I prefer the former.

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