The Bank of England published the results of the Climate Biennial Exploratory Scenario (CBES), which explores the financial risks posed by climate change for the largest banks and insurers operating in the UK.

19 Banks and insurers participating in the Climate Biennial Exploratory Scenario (CBES) were asked to use three scenarios to look at how climate-related risks could affect them. Two scenarios featured policies to limit global temperature rises (Early Action scenario and Late Action scenario), the third featured unchecked global warming (No Additional Action scenario). Each scenario examines the risks that could develop over a period of 30 years. The participating firms then modelled how their businesses could be affected in each scenario.

biennial Exploratory Climate Risk’ Scenario

The three key objectives of the exercise were to:

  • Improve banks’ and insurers’ climate risk management – banks and insurers were asked to model risks at a granular level, including by engaging with their largest counterparties to understand better their climate exposures.
  • Size the risks that participants in the exercise face – projections were based on their current balance sheets: for banks, the exercise focused on their credit books, whilst for insurers the exercise assessed risks to both their assets and liabilities;
  • Better understand the potential responses of banks and insurers to climate-related risks and their broader implications – we ran a second round of the exercise in part to gauge participants’ reactions to their initial responses.

biennial Exploratory Climate Risk’ Scenario

Key findings of the CBES

  • Projections of climate losses are uncertain. Scenario analysis in this area is still in its infancy and there are several notable data gaps. UK banks and insurers have made progress but still need to do much more to understand and manage their exposure to climate risks.
  • At an aggregate level UK banks and insurers are likely to be able to absorb the costs of transition that fall on them. The overall costs will be lowest with early and well-managed action to reduce greenhouse gas emissions and so limit climate change. Some costs that initially fall on banks and insurers will ultimately be passed on to their customers.
  • Governments set public climate policy, which will be a key determinant of the speed and shape of changes in the global economy. Banks and insurers have a collective interest in managing climate related financial risks in a way that supports that transition over time.

“Recent events such as the war in Ukraine and rises in energy prices illustrate the challenges banks and insurers can face from changes in their operating environment. Today’s exercise explores how well they are equipped to manage the longer-term challenges from climate change, in the context of our financial stability objective. We find that they are likely to be able to absorb the climate costs which fall on them without material risks to solvency, but will face significant headwinds and therefore need to continue to invest in their ability to support the economy’s transition to net zero.”

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the Prudential Regulation Authority

In the most severe scenario posed by the BoE, where no additional measures are taken to reduce the rise in global temperatures, the banks and insurers tested could face total losses of 334 billion pounds ($417 billion ) over three decades.

biennial Exploratory Climate Risk’ Scenario

Sources: BoE

  1. Results of the Climate Biennial Exploratory Scenario May 2021
  2. Key elements of the 2021 Climate Biennial Exploratory Scenario and related documents: June 2021
  3. The 2021 Biennial Exploratory Scenario on the financial risks from climate change: notes to accompany the Structured Data Templates and the Qualitative Questionnaire. June 2021
  4. Discussion Paper: The 2021 Biennial exploratory scenario on the financial risks from climate change. December 2019
  5. Supervisory Statement 3/19 ‘Enhancing bank’s and insurers’ approaches to managing the financial risks of climate change’: April 2019
  6. Sarah Breeden speech at University of Edinburgh and Environmental Association for Universities: Climate change – Plotting our course to Net Zero. May 2021
  7. NGFS ScenariosOpens in a new window: 7 June 2021
  8. Governor Andrew Bailey speech at BIS-BDF-IMF-NGFS Green Swan 2021 Global Conference – Tackling climate for real: progress and next steps. June 2021
  9. Governor Andrew Bailey speech at COP26 Laying the Foundations for a Net Zero Financial System, November 2021
  10. Sarah Breeden speech at TheCityUK International Conference, Balancing on the Net Zero Tightrope, April 2022
  11. See Climate change for the Bank of England’s work on climate change.