Bank launches first climate change stress test for lenders and insurers
The Bank of England has unveiled its first-ever stress test to examine the resilience of Britain’s largest banks and insurers to climate change risks over the next 30 years.
The test will examine the two main risks the sector faces from climate change – the impact of moving to a net zero economy as well as the physical effects of global warming, such as storms, floods and fires.
The bank will use three scenarios covering 30 years of early action by governments to tackle climate change, late action and no further action.
The UK’s seven largest lenders will participate, including Lloyds Banking Group, Barclays, NatWest Group and Nationwide Building Society.
Insurance giants like Aviva, Axa, Direct Line, RSA and Legal & General will also be part of the test.
But the bank said the test – which must be performed every two years – is only “exploratory” for now and, unlike its regular annual stress tests, will not be used to determine the amount of. cash that banks need to put aside on their balance sheets. a cushion against risks.
The bank will release the test results in May next year.
Andrew Bailey, Governor of the Bank of England, said: “Today’s exercise will help us assess the risks associated with climate change both for the largest banks and insurers as well as for the financial system in his outfit.
“The end result will be more robust management of climate-related financial risks across the industry,” he added.
The test will focus on the assessment of the extent of the risks on the bank credit portfolios and on the assets and liabilities of insurers.
While not used to determine capital requirements, the bank said the test would help it better model climate-related risks and inform future regulation.
Sarah Breedon, Executive Sponsor of the Bank for Climate Change, said: “While devilishly complicated, climate scenario analysis is an essential part of our toolkit for dealing with future uncertainty as to what might happen. get to our planet, our economy and our financial system.
“Some scenarios show the most efficient way to reach net zero while others highlight the risks of late or insufficient action.
“By highlighting the risks of tomorrow, they can help guide today’s actions.
“I encourage all companies, not just those who participate, to get involved and learn from this exercise.
But the sustainable economy campaign group Positive Money has warned the bank’s test does not go far enough and called on it to launch climate capital requirement rules.
David Barmes, Senior Economist at Positive Money, said: “The bank’s climate scenario analysis can be a useful exploratory exercise, but it’s time to move from exploration to action.
“By delaying the implementation of climate capital rules, the bank is undermining its duty to protect financial stability and support net zero.”