A climate stress-test is set to be implemented by the Bank using its 2021 biennial exploratory scenario (BES) to assess the resilience of some of the largest banks’ business models, insurers and the wider financial system to climate-related risks.
It will, therefore, evaluate the scale of adjustment that will need to be undertaken in coming decades for the system to remain resilient.
‘The 2021 Biennial Exploratory Scenario on the Financial Risks from Climate Change’ discussion paper will consult relevant stakeholders on the design of the exercise, with comments to be sent by 18th March 2020.
This includes financial firms, climate scientists, economists, other industry experts and informed stakeholder groups.
The paper explains that commercial and residential property prices would reflect the costs of climate-related damage to the housing stock.
Household income and corporate profits metrics would also be expected to be adjusted to reflect the cost of repairs to property and disruption to corporate supply chains.
In addition, the Bank of England has highlighted physical risks — which arise from the increasing severity and frequency of climate and weather-related events — as something which could “severely damage” property and other infrastructure.
The paper stated that these events “disrupt business supply chains, impact agricultural output and, more broadly, can lead to loss of life and migration”.
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“This reduces asset values, results in lower profitability for companies, damages public finances and increases the cost of settling underwriting losses for insurers,” it noted.
“Indirect effects on the macroeconomic environment, such as lower output and productivity, exacerbate these direct impacts.”
In terms of the UK adjusting towards a carbon-neutral economy, the Bank explained that there would need to be “significant structural changes”, which would in turn prompt a “reassessment” of a wide range of asset values, a change in energy prices, and a fall in income and creditworthiness of some borrowers, which could result in losses for lenders and investors.
Edward Clark, managing director at Uplift Finance, told Development Finance Today that the Bank of England’s paper pointed to a “deep structural change” to the global economy.
“Climate change brings us into entirely new territory — there is no roadmap for us to follow,” he said.
“The level of adaptation and innovation required will be vast.
“We will see certain properties devalue and traditional construction methods will be relied upon less.
“Banks will need to manage their portfolios around climate risk [and] their lending policy will reflect that.”
Edward also thought that banks would be less inclined to take long-term exposure on large sites.
“Those who correctly identify the trends and move at pace will be rewarded handsomely.
“There is a swathe of opportunity here for entrepreneurs.”