BOE Unveils Sweeping New Climate Test of Banks and Insurers

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The Bank of England started a major new stress test of the country’s biggest banks and insurers to judge how resilient they are to climate change.

The assessment, delayed last year because of the pandemic, requires HSBC Holdings Plc, Barclays Plc and other lenders to scrutinize the impact of global warming on everything from real estate to corporate loans. Aviva Plc and Phoenix Group Holdings Plc are among insurers also covered by the test.

The test will be based on three scenarios that assume early, late and no policy action on the climate over 30 years, as designed for central banks globally by the Network for Greening the Financial System. It’s meant as an “exploratory exercise” and won’t be used to set capital requirements, the BOE said.

“Though fiendishly complicated, climate scenario analysis is a critical part of our toolkit to address future uncertainty about what might happen to our planet, our economy and our financial system,” Sarah Breeden, the BOE’s executive sponsor for climate change, said in a statement on Tuesday.

The test is a significant milestone in the U.K.’s efforts to reckon with global warming and comes ahead of Britain hosting the COP26 climate summit in Glasgow later this year. The BOE said it will publish results in May 2022 on how the broader industry fared but won’t release results for individual firms.

Central bankers from around the world have been designing climate stress tests that aim to spot risks at banks that don’t adapt quickly to warming temperatures. Meanwhile, officials across Europe are writing regulations forcing lenders to reveal more details on how much business is considered green and sustainable, while fund managers are being told to disclose environmental risks.

European Banks’ Next Big Problem? The CO2 in Their Loan Books

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