Britain’s banks, already subject to annual financial health checks, face being stress-tested for risks posed by climate change, the Bank of England announced on Wednesday.
The BoE, whose outgoing governor Mark Carney will from January become the United Nations’ special envoy on climate action and finance, has published a discussion paper on what it has termed the 2021 Biennial Exploratory Scenario (BES) exercise.
“The objective of the BES is to test the resilience of the largest banks and insurers to the physical and transition risks associated with different possible climate scenarios, and the financial system’s exposure more broadly to climate-related risk,” the BoE said in a statement.
Writing on the Financial Times website, Carney added that Britain was hoping to “lead the way” on climate-related financial risk next year, when the COP26 climate talks will be held in Glasgow.
And he cited the BoE’s latest survey which found that about three-quarters of the banking sector, representing some $11 trillion of assets, were starting to treat climate risks like other financial risks.
The governor added in Wednesday’s BoE statement that “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”.
Carney said “climate change will affect the value of virtually every financial asset”, adding that “the BES will help ensure the core of our financial system is resilient to those changes”.
The BoE’s consultation on the issue will run until March 18.
“The final BES framework will be published in the second half of 2020 and the results of the exercise will be published in 2021,” it added.
A key feature of BES will be to test the resilience of the UK’s financial system against three climate scenarios.
“These range from taking early, late and no additional policy action to meet global climate goals,” the statement said.
The BoE noted that it plans aggregate results of the financial sector’s resilience to climate-related risk, rather than detailing the stress-test outcomes of individual banks and insurance groups.
The announcement comes after the COP25 climate summit wrapped up in Madrid on Sunday with a compromise deal that left little to show, prompting UN Secretary-General Antonio Guterres to lament a “lost opportunity” to act.
Almost a fortnight of Madrid talks, where Carney was also a speaker, simply squeezed out hard-earned compromises from countries over a global warming battle plan that fell well short of what science says is needed to tackle the climate crisis.