Bank of England Announces Second Round of Climate Stress Tests

A Brief Summary

The rolling out of the second round of Biennial Exploratory Scenario (BES) by The Bank of England will stress test and assess financial risks from climate change for banks and insurers in the UK.

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The regulation, for the first time, was introduced in June 2021, and since then, the BES has been dealing with several risks emanating from the operations of financial institutions, including transition and physical risks as of now. The framework also includes structural changes to the economy needed to achieve net-zero emissions.

The tests include three aspects, put forward by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), including 'early', 'late', and 'no action', which are considered, the most efficient pathway to target net-zero.

In the second round of BES, where the Bank of England's objective is to identify the challenges to the banks' business models arising from climate risks, measure their possible responses, as well as the impact on their financial services.

The other significant objectives of the stress tests include estimating the financial exposures of participants and assisting them in improving their management of climate-related financial risks. The Bank of England stated that it publishes the results from the climate BES most likely in May 2022.