London Market Insurers To Undergo Climate Stress Tests

The Bank of England has announced it will ramp up its efforts to drive risk management efforts over climate change, by becoming the first regulator in the world to stress test its financial services companies over the issue.

Speaking in London Mark Carney (pic) Governor of the Bank of England and UN Special Envoy for Climate Change Action said insurers and banks would be stress tested against a number of different climate pathways including the “catastrophic business as usual scenario”.

He said that managing climate financial risk required going beyond the static disclosure of a firm’s carbon footprint to the strategic in terms of how it planned to reduce its emissions as the world moves closer to a zero carbon economy.

“our stress test of the world’s leading international financial centre, will show how major financial firms expect to adjust their business models, as well of the prospective collective impact of these actions on the wider economy,” said Mr Carney. “The stress test will reveal the financial firms, and by extension the companies, that are preparing for transition, and it will expose those that have not.”

He added: “2020 must be a year of climate action, making COP 26 – co-hosted by the UK and Italy – a critical opportunity to help put emissions on a trajectory towards a net zero economy, consistent with the Paris Agreement.

“Recognising that net zero is both an imperative of climate physics and, in the UK and 120 other countries, the law of the land, financial markets are increasingly demanding clear disclosure and active management of climate opportunities and risks. Private finance is uniquely placed to help support the transition required by amplifying changes in attitudes, consumer preferences and climate policy. Markets can pull forward adjustments from the future, minimising costs and smoothing the adaptation.”

Gill Lofts, Sustainable Finance Leader at EY, said the the Bank of England’s announcement was a plus for the wider market.

“Today’s climate change announcement is a key step in the UK economy’s transition to net zero,” she explained. “The objective for every financial decision to take climate change into account is a strong and bold move and builds on the existing momentum from financial services firms in addressing climate change risk – and it demonstrates the industry’s pivotal role in the UK economy achieving net zero.

“However, the detail around what firms – both public and private – need to do to build on their current sustainability metrics or how they will report and measure is not yet clear. Banks, asset managers and insurers need to work closely with government and policy makers on this crucially important and complex matter. They will be keenly awaiting more information before they can act with real meaning and embed climate change into every financial decision they are making.”