Overview
Climate scenario analysis is a key part of our toolkit for understanding the macroeconomic and financial risks that could arise from climate change. Climate scenarios allow for the exploration of impacts and exposures at the level of the financial system under a range of different future pathways.
In June 2021, we published the Key Elements of our 2021 Biennial Exploratory Scenario (CBES). The CBES explored the resilience of UK banks and insurers to the financial risks associated with the physical impacts from climate change and the transition to a net-zero economy under three scenarios; Early, Late and No Additional Action. Each of the scenarios in our CBES built on a subset of the second phase of scenarios published by the Network for Greening the Financial System (NGFS).
This is the first time we have assessed the resilience of both UK banks and insurers to climate-related risks. The CBES allowed the Bank to capture the interactions between different firms and understand the risks presented by climate change to the financial system in aggregate.
We published the results of the CBES exercise in May 2022. The results indicated that climate risks captured in the exercise are likely to create a drag on the profitability of UK banks and insurers, particularly if they are unable to manage these risks effectively.
The CBES built on our Insurance Stress Test for 2019, which included an exploratory exercise in relation to climate change. The set of climate scenarios explored the impacts to both firms' liabilities and investments stemming from physical and transition risks.
As set out in the November 2024 Financial Stability Report, the FPC will continue to consider how to embed climate risks in the stress-testing framework where appropriate as part of its work to consider how risks from climate change could impact financial stability.