BoE confirms details of 2021 Climate Biennial Exploratory Scenario

Written by Michael Griffiths

08/06/2021

The Bank of England (BoE) has published details of its Climate Biennial Exploratory Scenario (CBES) to explore the financial risks posed by climate change for the UK’s largest banks and insurers.

The CBES is to use three scenarios of early, late and no additional action to explore what the Bank describes as two key risks from climate change.

These are the risks arising from the significant structural changes to the economy needed to achieve net zero emissions, ‘transition risk’, as well as risks associated with higher global temperatures, or ‘physical risks’.

This is the first time the BoE will test both banks and insurers to allow it to capture interactions between them and understand the risks presented by climate change across the financial system. The CBES is an exploratory exercise and will not be used by the Bank to set capital requirements.

Features of the exercise will include the three scenarios of early, late and no action built on a subset of the Network for Greening the Financial System (NGFS) scenarios, and the BoE confirmed that these will be applied over a span of 30 years to reflect the longer-term nature of climate-related risks.

The Bank also stated it will size the risks that participants face based on their current fixed balance sheets, a qualitative questionnaire to capture participants’ own views on their risks, and a detailed counterparty-level analysis for the largest counterparties.

BoE governor, Andrew Bailey, 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.”

The Bank confirmed that it expects to publish the CBES results in May 2022.

Related Articles