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Banks Concerned as BoE Climate Stress Tests Highlight ‘Data Gaps’

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The UK’s biggest banks and insurers are said to have been shocked by initial results of stress tests they’ve conducted into their resilience to climate-related financial risks.

Not only did they find the exercise difficult, some also found discrepancies in their findings. Now chief data officers (CDOs) have been summoned to examine whether the organisations had enough – or the correct – external data to supplement their own pools of intel.

“Potential impairments and aggressive timelines are likely causing board-level concerns, and participants from the Climate Biennial Exploratory Scenario (CBES) have started allocating the management actions related to data to the CDO to address the impact on the wider business arising from the CBES ‘data gap’,” Lorraine Waters, CDO at Solidatus, told ESG Insight.

The revelations come as 17 banks, insurers and other financial institutions prepare to publish the results of the Bank of England-requested tests by the end of the month. They make up part of the central bank’s CBES, which was formulated last year in order to establish how financial institutions were progressing towards meeting their sustainability targets.

The inaugural round of stress 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.

Coordination Challenges

Guidance on the stress tests was issued in June and participants are expected to report their findings by October 13 with an understanding initial results will be known by the end of September.

Waters comments add to industry talk of banks facing particular challenges in coordinating multiple departments and many strands of data to produce their reports.

Data experts were unsurprised that financial institutions would find the first round of tests troubling.

Paul Norris, Head of Climate Risk at data vendor ACIN, said his company had also found banks hadn’t found the exercise easy.

“CBES was a pain point,” Norris told ESG Insight.

Solidatus’ Waters said it was known that some participants were not happy with the results of their stress tests.

“Chief risk officers and chief financial officers will likely be finalising their initial responses and I suspect that one of the key findings will be the quality of data regarding climate change plans, as well as the sourcing and impact on the use of this data for risk, revenue and reporting purposes,” she said

“A number of organisations have already publicly highlighted the gap in available, trusted, verified external data and the impact on an organisation’s ability to understand transition risk and associated impairments.”

Data Templates

The exploratory exercise has set out to test participants’ vulnerabilities should their climate action policy be enacted in a short timeframe, in a medium timeframe before 2050 or if no action was taken at all.

The tests took the form of a range of quantitative data templates that had to completed as well as a qualitative questionnaire. They focused on the credit books of banks and the risks to both assets and liabilities of insurers.

Despite the apparent gloomy responses from banks, many say the exercises are beneficial in providing organisations with a snapshot of their activities and are a way of measuring organisations’ progress towards ESG targets, especially decarbonisation.

“Stress-testing has become a common tool of regulators and central banks to assess the readiness of banks to deal with sudden volatility in global markets,” Joseph Cordahi, Product Strategy Director At NeoXam told ESG Insight.

“If BoE stress testing for climate resilience is imminent, asset managers should get ahead of the curve not only to better cope with the potential volatility, but also to set them apart from their competition.”

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