KPMG UK RESPONDS TO BANK OF ENGLAND’S CLIMATE SCENARIOS EXERCISE
THE HEADLINE SUPPORTS THE RESILIENCE OF FINANCIAL SECTOR, BUT THERE IS LOTS STILL TO BE DONE TO ENSURE FINANCIAL SYSTEMS ARE RESILIENT TO CLIMATE RISK
THE HEADLINE SUPPORTS THE RESILIENCE OF FINANCIAL SECTOR.
Commenting on the first Bank of England Climate Biennial Exploratory Scenario out today, Begoña Ramos Justo, Partner in the Climate Risk and Strategy Team and Financial Services lead at KPMG said:
“It’s important to remember that the point of the exercise is not just to monitor firms’ ability to understand climate risks but also to encourage the financial system to manage these risks proactively and finance a smooth transition to a low carbon economy. This is widely accepted to be the best way to build a more resilient financial services sector. That said, there is clearly still a lot to be done despite the significant progress made.
“The report projected reductions of 10-15% of profitability across scenarios which on standalone basis will not jeopardise the stability of the system, but it could make financial services more vulnerable to other future events. One issue that the exercise lays bare, is the significant variances in results due to data and modelling uncertainties. In part this is because financial services firms face a struggle to obtain reliable and accurate information from their clients on current exposures to climate risks.
“Unsurprisingly, the carbon intensive corporates are severely impacted. Also of note, is that certain geographical locations are hit hard by rising unemployment and reductions in house prices driven in part by the lack of access to insurance. The report highlighted increases in annualised average losses for insurers by 50% in the UK and 70% in the US for participants by the end of the No Additional Action scenario but noted that this could be potentially much higher. As such, it will be important for firms to understand the credibility of the transition plans of these sectors and how they are performing in the years to come, so the financial system can finance an orderly transition to the low carbon economy - mindful that Banks and insurers have a duty of care to treat their customers fairly.
“The challenge will be how the rest of the market now learns from and adopts, where appropriate, the modelling capability built up by these participating firms, to get a broader understanding of the financial risks of climate change that lay ahead.”
“One remaining question is how the Bank of England will feature climate change in the capital regime, particularly given its current focus on a one-year timeframe. How will this be done in a practical way to ensure capital is allocated in the right places?
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