UK banks and insurers face big hits to profits unless they take immediate action over their exposure to climate change risks, the Bank of England warned Tuesday.

The BoE conclusion came in an initial stress test on how major British financial companies' balance sheets are likely to hold up faced with obstacles on the path to a net zero economy.

"Across scenarios, participants' projections show that if banks and insurers do not respond effectively, climate risks could cause a persistent and material drag on their profitability," the BoE concluded after a study of 19 financial institutions in the UK including HSBC, Barclays and Aviva.

"Loss projections vary across participants and scenarios, but are equivalent to an annual drag on profits of around 10-15 percent on average," the central bank predicted.

It added that such a level of fallout could make the financial system more vulnerable to other future economic shocks.

The BoE in June 2021 assessed "climate scenarios, testing different combinations of physical and transition risks over a 30-year period" for UK lenders.

The UK government wants a net zero carbon emissions nation by 2050.

"Achieving net zero will not be possible unless our societies make considerable investments in developing and disseminating new technologies, and will require major changes across the economy," Sam Wood, chief executive of the BoE's regulatory arm, said in comments accompanying the results of the stress test.

"A stable financial system can support households and businesses through these changes, and channel investment where it needs to go to support the transition," he added.

The BoE said projected bank credit losses were greatest in the "late action scenario".

The central bank said this would result in additional sector losses totalling about 110 billion pounds ($138 billion, 128 billion euros).

Total losses for the financial sector could meanwhile reach almost 350 billion pounds where no additional action is taken.

"The (UK) government and Bank of England must act fast to align the financial system with net zero," David Barmes, senior economist at lobby group Positive Money, said in reaction to the report.

"Outright restrictions on lending to new fossil fuel projects must now be on the table."

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