Bank of England planning mandatory climate ‘stress tests’ for banks and insurers

Aggregated results from the new tests are due to be published in 2021. Image: George Rex

The proposals, put forward by Bank of England governor Mark Carney on Wednesday afternoon (18 December), have been introduced in the hopes of quantifying the potential financial impact of climate change on the UK’s financial sector as a whole.

If introduced, the tests would analyse whether companies within the sector are “properly managing” both transition risks – the likelihood of losing assets as the transition to a low-carbon economy continues – and physical risks – whether assets will be damaged or rendered unproductive by occurrences such as droughts, flooding or fires.

Carney is proposing that the tests should be carried out over the next 18 months, with the results published in the second quarter of 2021.

The results would be published in aggregate form only, to give a broad view of progress on a sector-wide basis.

However, the Bank of England has said that it will write to individual firms privately if it finds they are performing badly. It already uses capital “add-ons” to put pressure on managers.

Carney, who is due to step down from the Bank of England in January and into his post as the UN’s special envoy for climate action and finance, described the proposed testing regime as a “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”.

He said: “Climate change will affect the value of virtually every financial asset… the [test] will help ensure the core of our financial system is resilient to those changes.”

Industry reaction

The move from the Bank of England has been broadly welcomed across the UK’s green finance sector, with PwC’s sustainability and climate change partner Jon Williams claiming that it will enable investors and regulators to compare progress by different firms.

But Williams, who also sits on the Task Force on Climate-related Financial Disclosures (TCFD), is urging banks and investors to continue to undertake their own risk analysis as well.

“Given the increasing materiality of climate-related impacts, and the growing expectations for firms to disclose in line with the recommendations of the TCFD, stress-testing represents good risk management,” he said.

“But ultimately, the stress-test should complement the tools and methodologies firms develop to reflect the nuances of their business, rather than a substitute for specific analysis on their own balance sheet.”

As of June, around 800 organisations had expressed support for the TCFD’s recommendations – but full implementation remained rare.

Linklaters global head of environment Vanessa Havard-Williams took a similar view, claiming that the Bank of England’s stress tests could move the financial sector past patchy and voluntary risk assessments and disclosures.

“Whilst participating firms will not be required to make changes based on the outcome, once the relevant risks have been quantified, there is likely to be a concerted push for individual firms and the sector as a whole to act,” she said.

Havard-Williams additionally highlighted that the Bank of England’s move is among a wider string of happenings which all point towards stronger policies around the integration of finance and climate change. The EU recently agreed taxonomy for green finance in a bid to prevent greenwash in the sector, for example, while the UK unveiled its own Green Finance Strategy this summer.

Now available on demand: edie’s climate-related financial disclosure webinar

Those keen to find out more about the present state of climate-related financial disclosure by businesses, and what best practice in this field will look like in 2020, are encouraged to watch edie’s free webinar on the topic on demand.

This one-hour webinar, hosted in association with edie’s upcoming Sustainability Leaders Forum 2020, heard from experts from Avara Foods, Landsec and the Climate Disclosure Standards Board (CDSB).


Sarah George

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