The objective of the 2021 BES is to test the resilience of the current business models of the largest banks, insurers and the financial system to the physical and transition risks from climate change. The exercise will provide a comprehensive assessment of the UK financial system’s exposure to climate-related risks and therefore the scale of adjustment that will need to be undertaken in coming decades for the system to remain resilient. To this end, the BES will focus on sizing risks, rather than testing firms’ capital adequacy or setting capital requirements. It will also allow the Bank to examine how major financial firms expect to adjust their business models, and what the collective impact of these responses on the wider economy might be. Finally, the BES will provide a vehicle for financial firms to identify and address data gaps and to develop cutting-edge risk management approaches.
This discussion paper sets out the Bank’s proposed framework for conducting the 2021 BES. Given the unique nature of climate-related risks, the 2021 BES will be a novel exercise for the Bank and for participating firms.