The Bank of England (BoE) has revealed new proposals for stress testing the financial stability implications of climate change.

The BoE published a new discussion paper which sets out its proposed framework for the 2021 Biennial Exploratory Scenario (BES) exercise, with the objective to test the resilience of the largest banks and insurers against the physical and transition risks associated with climate change.

The exercise will involve stress testing different climate scenarios as well as the financial system’s exposure to more broadly climate-related risks.

The Bank said its BES exercise will use exploratory scenarios to size any future climate risks to explore how firms might respond to them materialising over decades, rather than testing firms’ capital adequacy.

The governor of the BoE, Mark Carney, said: “The BES is a pioneering exercise, which builds on the considerable progress in addressing climate related risks that has already been made by firms, central banks and regulators.

“Climate change will affect the value of virtually every financial asset; the BES will help ensure the core of our financial system is resilient to those changes.”

The BoE indicated it is consulting on the design of the exercise and would welcome feedback from firms, their counterparties, climate scientists, economists and other industry experts by 18 March 2020.

The Bank also announced that its final BES framework will be published in the second half of 2020, and that the results of the exercise will be published in 2021.

The BoE executive director sponsor for climate change, Sarah Breeden, added: “None of us can know exactly how climate change will unfold, but we do know that it will create risks to the financial system.

“I am excited that this ground-breaking exercise will for the first time allow us to quantify this risk and so determine the actions we need to take today if we are to minimise these future risks.”

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