Climate Risk Models

Debate between Baroness Drake and Baroness Vere of Norbiton

Thursday 25th January 2024 Lords Chamber

[Baroness Drake]

To ask His Majesty’s Government what assessment, if any, they have made of the accuracy of climate risk models used by (1) the Bank of England, (2) financial services firms, and (3) pension schemes.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

The independent Bank of England’s climate biennial exploratory scenario builds on globally recognised scenarios from the Network for Greening the Financial System and represents an important milestone in assessing UK exposures to climate risk. However, we recognise that climate risk modelling is an evolving practice, and we support the Bank’s ongoing work to develop its modelling and supervision.

[Baroness Drake (Lab)]

My Lords, the Bank of England’s job is the prudential risk management of the financial system, and it influences the conduct of firms and pension schemes, hence the concern when we learned that its scenarios concluded that it does not much matter whether temperatures rise by 1.5, 2 or 4 degrees: the effect on profits will still be relatively small. How will the Government ensure that the regulator properly oversees the risk to financial stability from more extreme weather and rapid changes in the use of energy?

[Baroness Vere of Norbiton (Con)]

The outcome of the CBES exercise shows that, if banks and insurers do not respond effectively, climate risk could cause a persistent and material drag on profitability: bank credit losses amounted to £110 billion over the late-action CBES scenario. But the Bank of England has always been clear that it was the first time it had done an exercise based on these scenarios, which came from 2021, as I am sure the noble Baroness knows. The NGFS has now refreshed its scenarios, publishing its latest group in November 2023; those will be used by the Bank of England and, indeed, by many other people in the financial system going forward.