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BoE Publishes Results of First Supervisory Climate Stress Test

Without early action, the UK’s largest banks and insurers would suffer climate-related losses worth US$418 billion by 2050.

The Bank of England (BoE) has published the results of its Climate Biennial Exploratory Scenario (CBES) stress test, which explored the financial risks posed by climate change for the largest UK banks and insurers.

The CBES was first published last June, setting out three climate scenarios over a 30-year period, covering physical and transition risks, including one in which governments fail to take further steps to curb GHG emissions, resulting in average temperature rises of 3.3°C, and a 3.9-metre rise in sea levels.

Based on the results of the exercise, the BoE has warned that without early action to curb rising temperatures and sea levels, companies would suffer a surge in loan and mortgage defaults, investment losses, and climate-related lawsuits, resulting in climate-related losses worth £334 billion (US$418 billion) by 2050 for the UK’s 19 largest banks and insurers.

While banks are likely to be able to absorb climate costs without material risks to solvency, even under the worst case climate scenario under the CBES, delayed transition efforts would cause banks alone to suffer £110 billion worth of losses, the BoE says.

“The first key lesson from this exercise is that over time, climate risks will become a persistent drag on banks’ and insurers’ profitability, particularly if they don’t manage them effectively,” said BoE Deputy Governor Sam Woods. “While they vary across firms and scenarios, overall loss rates are equivalent to an average drag on annual profits of around 10-15%.”

The BoE notes that the projections of climate losses are still uncertain as scenario analysis in this area is “still in its infancy and there are several notable data gaps”. While UK banks and insurers have made progress, there is still much that needs to be done to understand and manage their exposure to climate risks, the central bank said.

“All participating firms have more work to do to improve their climate risk management capabilities. The Bank will engage with firms individually and collectively to help them target their efforts, and share good practices identified in this exercise.”

The BoE has so far declined to publish data for individual firms, and has previously indicated that it does not plan to use the CBES results to set capital requirements. The results are intended to help inform policymaking and supervisory efforts.

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