I have always firmly believed that businesses should play a larger role in leading our society towards a net zero economy. As you can imagine, I was one of the many who welcomed the Bank of England’s announcement of the 2021 Biennial Exploratory Scenario (BES). The 2021 BES is a stress test that aims to explore the financial risks posed by climate change by testing the resilience of participants – the largest banks and insurers.
In May 2020, the PRA announced that the planned BES would be postponed until at least mid-2021 to alleviate the operational burdens affecting firms due to COVID-19. However, this is not a reason to delay preparing for BES. Instead, you should see this is as opportunity to get on the front foot. As your business adapts to the challenges caused by the recent pandemic, you should consider how the lessons learned from this crisis can be applied to climate risk (as laid out in our recent publication). Consider what strategic plans you can implement to avoid similar future shocks.
The scope and breadth of the BES will undoubtedly be challenging, especially for firms who have not yet begun to assess their exposure to climate risk. Here are some ways in which your business can start to prepare for the BES:
The race towards effectively managing climate risks looks a lot more like a marathon than a sprint. Your business will need to take a strategic approach to ensure that climate risk frameworks can be used and embedded into risk management processes on an ongoing basis.
You should expect to encounter significant blind spots along the way, as many of the tools and related data are still under development. However, as Sarah Breeden, the Bank of England’s Executive Sponsor for Climate Change, made clear in her recent address, “imperfection is not an excuse for inaction.”