"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."
Its discussion paper sets out its proposed framework for 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 Bank says that whilst climate-related risks will materialise over decades, "actions today will affect the size of those future risks". The Bank added that it is important for firms to develop innovative approaches to measure climate-related risks before it is too late to ensure resilience to them.
The BES will use exploratory scenarios to size these future risks and to explore how firms might respond to them materialising, rather than testing firms’ capital adequacy.
The Bank is consulting on the design of the exercise and welcomes 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.
Governor Mark Carney said: “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.”
Sarah Breeden, executive director sponsor for climate change, commented: “None of us can know exactly how climate change will unfold, but we do know that it will create risks to the financial system. I am excited that this ground-breaking exercise will for the first time allow us to quantify this risk and so determine the actions we need to take today if we are to minimise these future risks.”
Lorraine Johnston, regulation counsel at law firm Ashurst, added: "Most banks will have already taken steps to position themselves ready for the introduction of climate change stress testing. Today’s announcement however clarifies what is a relatively challenging timescale for delivery of the first climate change stress test results, particularly as the first half of 2020 will be taken up with consultation on the exact metrics to be used. But the Bank of England clearly acknowledges that on this issue there is little time to lose."
