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Bank of England Climate Tests Criticised, but Could Show Route to Net-Zero

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The Bank of England’s examination of the lending sector’s vulnerabilities to climate-related shocks has come under fire even as gaps exposed in the exercise have helped show how the industry can decarbonise.

The London-based central bank has been accused of giving banks and insurers an easy pass on proofing their lending activities against climate risks. A report in the UK’s Guardian newspaper said politicians and campaigners were angry that climate stress tests set by the Bank had come with no penalties for lenders who still support carbon-intensive activities.

Nevertheless, it is understood that the pilot tests – which were set in the summer and whose results were handed to policy makers last month – have highlighted where lenders’ weaknesses are and how they can address them.

The latest controversy follows a report by *ESG Insight* (read more here) in September that the 17 stress-test participants, which include Barclays Bank and insurer Aviva, had found the exercise difficult. They couldn’t find the right data to satisfy regulators and were also said to be concerned at discrepancies found in their results.

Action Policy

The pilot tests are part of the the central bank’s attempt to introduce an ESG reporting framework for benchmarking financial institutions’ progress towards their sustainability targets. The Climate Biennial Exploratory Scenario (CBES) seeks to examine financial institutions’ vulnerabilities should their climate action policies be enacted in a short timeframe, in a medium timeframe before 2050 or if no action was taken at all.

The tests were conducted by: Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander UK, Standard Chartered and Nationwide Building Society. Life insurers Aviva, M&G, Legal & General, Phoenix and Scottish Widows were also included, as were general insurers RSA and Direct Line, and the UK units of AXA, Allianz and AIG.

While the Bank gave no comment on the report, it is reviewing the test results and assessing the design of the exercise, which is likely to be held again in the new year. The tests and the methodologies behind them are also expected to be discussed at a conference on climate change and capital requirements next year.

The CBES exercise has highlighted data and methodological gaps in banks’ and insurers’ reporting capabilities. While it’s not thought these can be addressed immediately, officials are said to at least have more clarity on what needs to be done to fill them and carry the industry forward.

Bank Initiatives

The Bank has sought to clean up the industry through various channels.

Its Prudential Regulation Authority (PRA) already requires that banks hold enough capital buffers to withstand climate shocks. The PRA has a set a deadline of the end of this year for lenders to have in place procedures to demonstrate they are adequately covered.

In its Climate Change Adaptation Report released last month the PRA said it is examining whether changes to the tests’ design are needed. An update is expected next year.

A separate Bank of England-led report by the Network for Greening the Financial System (NGFS) highlighted challenges existed in obtaining the correct data for similar stress tests around the world and that more work was to being carried out on the issue.

The Guardian report also quoted Caroline Lucas, a Green Party MP in the UK parliament, criticising the Bank for failing to disclose the results of the tests.

“It needs to rectify these failures if it is to have any credibility during climate finance negotiations,” Lucas was quoted as saying, referring to the COP26 UN climate summit being held in Glasgow this week.

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