06/08/2021 | News release | Distributed by Public on 06/08/2021 01:37
The CBES uses three scenarios of early, late and no additional action to explore the two key risks from climate change: the risks arising from the significant structural changes to the economy needed to achieve net zero emissions - 'transition risk' and risks associated with higher global temperatures - 'physical risks'. This is the first time we are testing both banks and insurers to allow us to capture interactions between them and understand the risks presented by climate change across the financial system.
The objectives of the exercise are to:
The CBES is an exploratory exercise. It will not be used by the Bank to set capital requirements. Instead, participants' submissions may inform the Financial Policy Committee's future approach to system-wide policy issues, and the Prudential Regulation Authority's (PRA) future supervisory approach.
The key features of the CBES are:
The Bank intends the CBES to be a learning exercise. Experience and expertise in modelling climate-related risks is still relatively immature, so this exercise will develop the capabilities of both the Bank and the CBES participants.
Andrew Bailey the Governor of the Bank of England said: 'Today's exercise will help us size the risks from climate change for both the largest banks and insurers as well as the financial system as a whole. It's a novel exercise as firms will have to engage closely with their counterparties in order to get detailed data on those counterparties' exposures to these risks. It will stretch the time horizon over which the banks and insurers assess these risks and it will require them to build up their own scenario analysis capabilities, helping them to understand better how they are exposed under different potential climate pathways. The end result will be more robust management of climate related financial risks across the sector.'
Sarah Breeden, the Bank of England Executive Sponsor for climate change said: 'We are excited to launch today's climate scenarios, which build upon the second iteration of NGFS scenarios released yesterday. They provide central banks and supervisors around the globe with a common starting point for analysing climate risks under different future pathways. Though fiendishly complicated, climate scenario analysis is a critical part of our toolkit to address future uncertainty about what might happen to our planet, our economy and our financial system. Some scenarios show the most efficient pathway to net zero, while others highlight the risks of late or insufficient action. By highlighting the risks of tomorrow, they can help guide actions today. I encourage all firms, not just those participating, to engage in and learn from this exercise.'
The Bank expects to publish the CBES results in May 2022.