The Bank of England (BoE) announced today the launch of the second round of the Biennial Exploratory Scenario (BES) exercise, its stress test aimed at assessing financial risks from climate change for UK’s large banks and insurers.
Initially unveiled in June 2021, the BES is designed to explore the climate-related risks facing the financial institutions, including both transition risk, or those arising from the significant structural changes to the economy needed to achieve net zero emissions, as well as physical risks, or those associated with the impact of higher global temperatures.
The tests use three scenarios based on those prepared by Network of Central Banks and Supervisors for Greening the Financial System (NGFS), including ‘early’, ‘late’ and ‘no action,’ which highlight a range of outcomes encompassing scenarios that follow the most efficient pathway to net zero, as well as those from pursuing late or insufficient action.
The second round of the BES is focused on the BoE’s objective to understand the challenges to the banks’ business models arsing from climate risks, and gauging their likely responses as well as the implications for the provision of financial services. The questions in the current round will explore the strategic responses to the NGFS scenarios, and the associated implications to the banks’ and insurers’ business models.
Other key objectives of the stress tests, examined in other BES rounds include sizing the financial exposures of participants and the financial system more broadly to climate-related risks, and assisting participants in enhancing their management of climate-related financial risks, which includes engaging with counterparties to understand their vulnerability to climate change.
The BoE stated that it expects to publish results from the Climate BES in May 2022.