Group warns Bank of England over “systemic risk” of high carbon investments

Investors and campaign groups write to BOE Governor

A group of leading investors and campaign groups has written to the Bank of England urging the central bank to consider the UK’s exposure to high carbon investments as a “systemic risk”.

Signatories to the letter to Bank of England Governor Sir Mervyn King include Aviva Investors, Climate Change Capital, the Carbon Disclosure Project, leading academics, UKSIF and Fair Pensions.

The group is urging the bank’s new Financial Policy Committee to look at how the UK’s exposure to high carbon investments “might pose a systemic risk to our financial system”. It also calls on it to look at the options for managing the potential threat to economic security.

“The depth and breadth of our collective financial exposure to high carbon, extractive and environmentally unsustainable investments could become a major problem as we transition to a low carbon economy,” the letter states.

The signatories point out that five of the top 10 FTSE 100 companies are “almost exclusively high carbon” and that they alone account for 25% of the index’s entire market capitalization.

“This exposure is likely to be replicated in other indices, by companies, in bank loan books and in the strategic asset allocation decisions taken by institutional investors.

“At present regulators are not monitoring the concentration of high carbon investments in the financial system and have no view on what level would be too high.”The group warns that institutional investors face “stranded assets and poor returns” over a 20-30-year period if they have to invest in high carbon sectors.

Investors are obliged to invest in carbon intensive main market indices, due to liquidity requirements and the desire to track average market performance, the letter says. And it adds that new regulatory requirements, such as Basel III and Solvency II, can make it more difficult to invest in longer term assets like low carbon infrastructure.

“In such situations we believe that regulators have a role to play in protecting investors from systemic risk.”

The letter grew out of a report from the research group the Carbon Tracker Initiative, under project director James Leaton, which has produced analysis estimating that coal reserves equivalent to 44 gigatonnes of CO2 are held by London Stock Exchange listed firms. It added that a third of coal listed in the UK is actually located in Australia.

Selected signatories to Bank of England letter:

  • Paul Abberley, CEO, Aviva Investors
  • James Cameron, founder, Climate Change Capital
  • Catherine Howarth, CEO, FairPensions
  • Dr Aled Jones, Director, Global Sustainability Institute Anglia Ruskin University
  • David Nussbaum, CEO, WWF-UK
  • John Sauven, Executive Director Greenpeace UK
  • Penny Shepherd, CEO UK Sustainable Investment and Finance Association
  • Paul Simpson, CEO Carbon Disclosure Project