Bank of England to model climate risks to financial firms

Bank of England to model climate risks to financial firms

The Bank of England is to model the scale of climate-related risks to UK financial firms over a thirty-year time horizon.

The central bank believes that whilst climate-related risks will materialise over decades, actions today will affect the size of those future risks.

The Bank of England's Biennial Exploratory Scenario (BES) will cover multiple scenarios that cover climate as well as macro-variables: to test the resilience of the UK’s financial system against the physical and transition risks in three distinct climate scenarios. These range from taking early, late and no additional policy action to meet global climate goals.

Both banks and insurers will be subject to the tests, although the Bank will only disclose aggregate results of the financial sector’s resilience to climate-related risk rather than individual firms.

BofE governor Mark Carney says: “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.”

The Bank is consulting on the design of the exercise and is calling for feedback on the feasibility and the robustness of these proposals from firms, their counterparties, climate scientists, economists and other industry experts by 18 March 2020.

The final BES framework will be published in the second half of 2020 and the results of the exercise will be published in 2021.

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