The Bank of England has published a discussion paper to set out its proposals for stress testing the UK’s financial institutions’ resilience to climate-related risks.
The framework will form the basis of the 2021 Biennial Exploratory Scenario (BES). This stress test will examine how the largest banks and insurers will be exposed to risk from possible climate change scenarios, as well as more broad exposure to the impact of climate change.
The Bank’s proposal suggests that modelling will look at a 30 year period, and take a ‘bottom up’ approach, examining UK finance firms’ different businesses across the world. This approach is due to the long term nature of climate change, and the way it may affect different parts of the globe in varying ways.
In a press release, Governor of the Bank of England, Mark Carney, said:
The BES is 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. Climate change will affect the value of virtually every financial asset; the BES will help ensure the core of our financial system is resilient to those changes.”
Sarah Breeden, the Executive Director sponsor for climate change, said:
None of us can know exactly how climate change will unfold, but we do know that it will create risks to the financial system. I am excited that this ground-breaking exercise will for the first time allow us to quantify this risk and so determine the actions we need to take today if we are to minimise these future risks.”
The Bank of England is now consulting on its initial stress test proposals, and is seeking feedback from climate scientists, economists and financial industry experts. The full discussion paper is available on the Bank of England website.
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