It’s time to stop talking and take action

Stress tests can help keep you resilient

We’ve spoken many times about the enduring threat of climate change and how this and many other issues have been eclipsed by the current health pandemic. The threat of climate change remains high but there are actions we can take to protect our environment and our businesses. In a recent speech from Charlotte Gerken, given at the Insurance Risk and Capital EMA virtual conference, she talked about the importance of stress testing and its role in the insurance industry in assessing resilience to potential threats. Stress testing is a vital exercise that all businesses should be employing to counteract potential future risks and uncertainty.

In particular, Charlotte’s speech focuses on the key role of stress testing in the financial sector in 2021 in the form of the Bank of England’s 2021 biennial exploratory scenario (BES). This explores the financial risks posed by climate change and is designed “to test the resilience of the current business models of the largest banks, insurers, and the financial system to climate related risks – as well as the scale of adjustment that will need to be undertaken in coming decades for the system to remain resilient.” And, given the timeframes she encourages firms to start looking at this sooner rather than later and how the Bank of England is continuing to have further engagement with “financial firms, climate scientists, economists, other industry experts, and informed stakeholder groups to support this work.”

Working with experts

Working with experts who really understand and can help with targeted and detailed stress testing can make the difference to your resilience strategy. Data without context is meaningless. You need experts on hand to help you choose, interpret, and get value from the process to implement effective climate risk impact scoring. This is crucial for insurance and financial institutions, where the catastrophic impact of climate threats can be so damaging. In fact, in a Commons statement last week Rishi Sunak said our departure from the EU meant the financial services sector – which employs more than a million people – was entering a new chapter.

“This new chapter means putting the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment. We’re announcing the UK’s intention to mandate climate disclosures by large companies and financial institutions across our economy, by 2025, going further than recommended by the Task Force on Climate-related Financial Disclosures, and the first G20 country to do so.”

Andrew Bailey, Governor of the Bank of England has also recently said: “Our goal is to build a UK financial system resilient to the risks from climate change and supportive of the transition to a net-zero economy.”

It’s time to stop the talking and for everyone to take decisive action. Stress testing is certainly a step in the right direction.

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