The Bank of England (BoE) has announced it will launch the delayed climate stress tests for major UK banks and insurers in 2021. BoE Governor Andrew Bailey made the commitment in a speech on Monday, November 9 to the Green Horizon Summit held by the Corporation of London.
The stress tests, known as the Climate Biennial Exploratory Scenario (CBES), will use three potential scenarios to explore the resilience of banks and insurers to climate-related risks over a 30-year period. The tests will assess the impact of physical climate risks (such as floods, storms and sea level rise) and transition risks (such as a sudden fire sale of stranded assets) on current business models and balance sheets.
The CBES was originally announced in 2019 but was delayed due to the Covid-19 pandemic. The new timeline includes publication of the scenarios in June 2021 with submissions by participating organisations due by the end of September. The results of the stress tests will be published in March 2022.
Seven large UK banks, ten large insurers and ten Lloyd’s Managing Agents have been invited to participate in the stress tests, and all are likely to comply. The Bank has already had substantial consultation with these companies and has provided them with a provisional set of scenario variables, along with draft questionnaires and data templates. Companies are encouraged to use the Taskforce for Climate-related Financial Disclosures (TCFD) framework and latest tools to measure, model and disclose their climate risks and opportunities.
The CBES tests are similar to the European Central Bank’s supervisory climate-related stress test planned for 2022. A report on an earlier ECB investigation of its climate-related risk preparedness and disclosures is due later this month.
Announcing the relaunch of CBES, Governor Bailey warned that uncertainty and lack of data is not an excuse.
“Investments that look safe on a backward look may be existentially risky given climate risks,” Bailey said. “And investments that might have looked speculative in the past could look much safer in the context of a transition to net zero. We expect firms to make reasonable judgements rather than default to ‘zero’.”
“We all know an economy-wide transition to net zero is a huge task,” Bailey added. “But our experience with Covid has powerfully demonstrated our ability to adapt, which should give us all comfort that the task we face should be achievable.”
This page was last updated April 23, 2021
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