The UK’s top banks and insurers may be tested together in 2021 for the financial impact of climate change, according to a new Bank of England paper.
The tests would include three different scenarios and would assess how firms would deal with more frequent weather events and mass sell-offs of “brown assets” – those considered detrimental to the environment.
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In some scenarios companies would be tested against temperature rises of 4 degrees celsius by 2080.
The BoE said in a discussion paper, released on Wednesday, that there would be no pass or fail mark and that individual firms would not be named in the results.
BoE Governor Mark Carney described it as a “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”.
He added: “Climate change will affect the value of virtually every financial asset…the [test] will help ensure the core of our financial system is resilient to those changes.”
The BoE said the results of the test would be used to assess if firms are prepared for potential disruption as the UK switches to a low-carbon economy.
This is particularly important as the government has set a 2050 date for the UK to have net-zero CO2 emissions.
It is expected that the results of the climate change stress tests will be released in the second half of 2021.
This would coincide with the BoE’s normal annual stress testing, which involves firms such as Barclays, HSBC and Lloyds Banking Group.
All seven companies involved in the normal stress tests will be involved in the new climate change probe.