Governor of the Bank of England Andrew Bailey announced at the Green Horizon Summit that the UK climate stress test for commercial lenders will be launched in June 2021.
While more detail on the key aspects, such as data requirements and scenario variables, is still to come the speech set out that the exercise will explore three different climate scenarios and test different combinations of physical and transition risks over a 30-year period.
The stress test is aimed at sizing the risks faced by banks and insurance companies in different climate scenarios and to help improve their risk management practices. It was also made clear that the results of the stress test will not be used to size firms' capital buffers. Alongside those goals, Bailey also positioned the stress test in its wider context as an important part of the economic recovery from COVID-19 and clearly set out that supporting the transition to net zero is a critical part of that recovery.
Bailey noted the delay to the exercise brought about by COVID-19 but as set out above, he clearly views now as the time for action. Having referred in his speech to the separate prudential supervisory expectations, encouraged TCFD-aligned reporting and with the UK Government and FCA making their own announcements on that topic, there is clearly a lot to be done. Now, we just have to actually do it.
Investments that look safe on a backward look may be existentially risky given climate risks. And investments that might have looked speculative in the past could look much safer in the context of a transition to net zero. Uncertainty and lack of data is not an excuse. We expect firms to make reasonable judgements rather than default to “zero”. UK banks and insurers must work to develop these capital assessments over the coming year and the Bank will be working in tandem to develop its approach to reviewing them.