[co-author: Niharika Parshurampuria]
The Bank of England has announced its climate stress test exercise for the financial services sector will be held in June 2021.
Climate stress test launch
The stress test is a tool to (i) measure the risks faced in three different climate change scenarios; (ii) understand how different insurance and bank business models will be impacted and their respective responses; and (iii) improve firms' risk management practices.
The exercise will involve testing different combinations of physical climate risks (risks associated with physical damage from environmental disasters) and transition risks (risks associated with the move to a carbon-neutral economy) over a 30-year period.
The Bank of England Governor, Andrew Bailey, in his speech on 9 November 2020, announced the new June 2021 launch date for the Bank of England's climate stress test exercise. The previous 2020 date was set aside following the COVID-19 outbreak.
He also confirmed that the results of the stress test would not be used to size capital buffers. He nevertheless reminded firms of the expectation that they assess the impact of climate risks on their businesses and ascertain whether they ought to be holding additional capital in light of their assessments.
The Bank of England will provide further information on the three scenarios and data requirements in the coming months.
The re-scheduling of the delayed climate-related stress test indicates renewed regulatory focus on climate-related financial exposures and the green agenda, reflecting the UK government's commitment to transitioning the economy to net zero by 2050.
UK Government developments
Separately, the UK Government has also announced a series of new green finance-related measures.
The plans include: (i) issuing the UK's first ever Sovereign Green Bond in 2021 (subject to market conditions); (ii) implementing a green taxonomy (based on the EU taxonomy); and (iii) introducing more robust environmental disclosure standards. This will help support sustainable financial flows, meet the UK's 2050 net zero target, and extend the UK's global leadership in green finance.