FIN.

BoE to stress test for climate change risks

The Governor of the BoE addressed the inaugural Task Force on Climate-related Financial Disclosures (TCFD) summit in Tokyo yesterday.  In his speech, Mr Carney warned of the growing challenges climate change brings, and urged the financial sector to promote sustainable finance and help the transition to net zero.

Mr Carney noted the rapid increase in global support for TCFD disclosure over the last two years; 80% of the top G20 companies are now disclosing climate-related financial risks in line with TCFD recommendations.  In the UK, almost 75% of UK banks are starting to treat climate change risks like any other financial risks instead of merely a corporate social responsibility issue.  To capitalise on this support, the PRA and FCA have established a Climate Financial Risk Forum to work with companies across the industry to develop best practices.

Mr Carney announced that the BoE itself will become the first regulator to stress test banks against different climate ‘pathways’, including the “catastrophic business as usual scenario” and the transition to net zero by 2050.

Despite the significant progress made by the industry in the last two years, Mr Carney acknowledged that more is required.  Recommendations include:

  • Increasing the quantity and quality of disclosures by sharing best practice;
  • Refining the TCFD disclosure recommendations to determine which are most decision-useful before they become mandatory;
  • Spreading knowledge on how to use the disclosure information to realise opportunities and manage risk; and
  • Working to how to disclose the extent to which portfolios are ready for the transition to net zero.

The BoE intends to carry out the stress tests in 2021.

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Roseyna Jahangir