The Bank of England is planning to include the impact of climate change in its UK bank stress tests as early as next year, in what would be an unprecedented move for a central bank of a major financial centre. Mark Carney, BoE governor, told the Financial Times in an interview that he was weighing whether the risks — as well as the opportunities — from climate change should form a part of its stress test known as the exploratory scenario in 2019.
The BoE tests the balance sheets of the biggest UK lenders every year against a doomsday scenario to ensure they have enough capital to withstand a shock without needing a taxpayer bailout. It has also introduced an exploratory scenario every two years. Banks cannot pass or fail this part of the exercise — instead they are required to scrutinize whether they are doing enough around a particular issue.
The news follows on the heels of the UN’s 24th climate change conference, known as COP24, where EU finance ministers are advancing European Banking Authority studies on mandatory ESG (Environmental, Social, Governance) disclosures for banks in three years and regulatory reporting requirements as part of “greening” financial flows in Europe.
The first such test, in 2017, made banks consider the threats and opportunities posed by fintech, and suggested that traditional lenders were optimistically presuming new technologies would let them cut costs without losing much market share. A survey earlier this year by the BoE revealed that only 10% of banks were taking a long enough view of climate-related risks.
While Carney did not specify the types of climate-related scenarios the bank could test, lenders are already looking at issues such as how mortgage portfolios could be affected by flooding and how investments in companies such as oil groups could be hit by global warming. The BoE has already proposed that boards of banks and insurers identify a senior executive to take charge of managing climate change risks and report to the board — or face consequences.