Under the ambitious new plans, Britain’s largest lenders and insurers would undergo climate stress tests on their trillions of pounds of assets, similar to the financial stress tests they must already pass.
The climate tests will model how banks might cope with three sets of climate scenarios in which they take early, late or no action to meet emissions targets.
Institutions that fail may be ordered to hold more capital or get rid of certain assets to lower their exposure to climate change. This will potentially make it more expensive for banks to finance climate-damaging activity.
The bank said the tests would allow it to quantify climate change risks to the financial system for the first time.
It is now working out how to design the tests, and expects more details to be published in the second half of next year. A first round of test results is pencilled in for 2021.
Bank of England governor Mark Carney described the proposed testing regime as a “a pioneering exercise, which builds on the considerable progress in addressing climate-related risks that has already been made by firms, central banks and regulators”.
He added: “Climate change will affect the value of virtually every financial asset… the [test] will help ensure the core of our financial system is resilient to those changes.”
The financial services industry faces increasing scrutiny over its role in climate change, with an increasing number of insurers and fund managers pulling out of investments in fossil fuel firms.
Earlier this month, billionaire hedge fund manager Sir Christopher Hohn warned he would begin taking action against companies that do not do enough to tackle the climate emergency.
Sir Christopher, founder of TCI Fund Management, which manages more than $28bn (£21bn) of assets, has sent letters to big companies in which it invests, including Google and Airbus.
TCI said it would “typically vote against all directors of companies which do not publicly disclose all of their emissions and do not have a credible plan for their reduction”. The fund manager warned it would consider selling its shares if climate change risks were not properly disclosed.