"It's vital for the smooth transition to a lower-carbon economy that firms understand how their portfolios are exposed to climate-related risks and a climate stress-test is a powerful tool for developing that understanding.
“However, banks and insurers are urged to undertake their own climate scenario analysis and stress-testing, ahead of the BoE's planned Biennial Exploratory Scenario (BES) in 2021. Given the increasing materiality of climate-related impacts, and the growing expectations for firms to disclose in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), stress-testing represents good risk management.
"Firms need to think about how their businesses, operations and clients are exposed to physical, transition and liability-related risks, using different scenarios over multiple time frames. The BoE's climate stress-test model will also provide investors and regulators some comparability across different firms. But ultimately, the stress-test should complement the tools and methodologies firms develop to reflect the nuances of their business, rather than a substitute for specific analysis on their own balance sheet.
"Nevertheless, it’s encouraging that the BoE plans to take its thinking on a climate stress-test forward through the Network for Greening the Financial System (NGFS). Coordination on a global level is very important as financial services organisations should not have to contend with diverging requirements across different parts of their global structures."
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