Written by Pooja Bokhiria and Alex Gillespie

On 8 June 2021, the Bank of England (‘BoE’) launched its Climate Biennial Exploratory Scenario (‘CBES’). The CBES explores the financial risks posed by climate change for the largest UK banks and insurers

The CBES uses three scenarios of early, late and no additional action to explore “transition risk” (the risks arising from the significant structural changes to the economy needed to achieve net zero emissions) and “physical risks” (the risks associated with higher global temperatures).

The CBES is an exploratory exercises which may inform the Financial Policy Committee’s future approach to system-wide policy issues and the Prudential Regulation Authority’s future supervisory approach.

The BoE states that the key features of the CBES are:

• “Three scenarios of early, late and no action built on a subset of the Network for Greening the Financial System (NGFS) scenarios: these are applied over a span of thirty years reflecting the longer-term nature of climate-related risks;
• Sizing the risks participants face based on their current (fixed) balance sheets: for banks, the exercise will focus on their credit books, whilst for insurers, the exercise will assess risks to both their assets and liabilities;
• Qualitative questionnaire: this will capture participants’ own views on their risks, their approach to climate risk management, and their potential management actions, and
• Detailed counterparty-level analysis for the largest counterparties: the CBES asks firms to use novel modelling approaches to conduct a detailed, bottom-up analysis of their largest counterparties. For the remainder of counterparties, firms are expected to differentiate exposures by geography and sector.”

The results of the CBES are expected to be published in May 2022.

For further information, please see the BoE’s news release and Key Elements document.