LONDON (Reuters) - Britain’s top banks and insurers should be tested together for the first time in 2021 to quantify the potential financial hit from climate change to their businesses, the Bank of England proposed on Wednesday.
But there will be no pass or fail mark when the results are published in the second quarter of 2021, and no individual firm will be named, the central bank said in a discussion paper asking for industry feedback on its plans.
“Climate change will affect the value of virtually every financial asset,” BoE Governor Mark Carney said in a statement.
Climate change and the regulatory and political response to environmental problems are increasingly seen as one of the biggest long-term threats to the financial industry.
Switzerland’s financial market supervisor FINMA this month identified broad-based risks ranging from rising natural catastrophe costs that could cause significant losses for insurers to a drastic repricing of climate-exposed assets.
The BoE said the aim of the test would not be to check whether banks and insurers hold enough capital to withstand the impact of climate change on their assets and business models.
Only aggregate results will be published but the BoE will use results of individual firms to check if they are properly managing risks from the shift to a low carbon economy and physical damage from bad weather to property and infrastructure.
As with other risks facing banks and insurers, the BoE has a range of tools it can use to change behaviour, such as capital “add-ons” and putting pressure on managers who have direct responsibility for dealing with climate change risks.
The main UK-based banks that take part in the current annual stress test of lenders will be included in the 2021 exercise along with a representative number of insurers.
The test will assess the impact of climate change on asset prices and business models over three scenarios: taking early action, acting late, or taking no action at all to meet global climate goals.
The BoE has already included a climate risk element in this year’s stress test for insurers, whose results will be published in the first quarter of 2020, and which are seen as a pilot for the 2021 test.
It will publish detailed scenarios for the test next April, which will be closely watched by central banks in other countries.
Reporting by Huw Jones; Editing by Catherine Evans