The Bank of England (BoE) is postponing its climate stress tests, which have been previously well regarded as a ground-breaking initiative to enable in-depth analysis of the impact of global warming on business models and operations of both banks and insurers.
The bank’s Prudential Regulation Authority (PRA) and the Financial Policy Committee in a statement on priorities in light of the impact of the current global lockdown, has said it will delay the launch of its climate biennial exploratory scenario, which will test the resiliency of the largest financial firms’ business models to the physical and transition risks from climate change, until at least mid-2021.
The PRA also said it won’t publish information about its 2019 stress tests of insurers, which was to include calculations of climate risks for the first time.
Central banks worldwide have been increasingly involved in the debate over climate change and its impact on the financial system. The BoE has led the way to date in encouraging banks and insurers to assess exposures to global warming and new risks which can come with the move towards a low-carbon economy.
So what does this mean for banks & insurers, all of whom would have been making boardroom level plans for the impending stress tests?
Firstly, a short postponement of the Bank’s stress tests is completely understandable, given the realignment of central banks all over the world to refocus financial policies and double-down on help to try to manage the economic fall out of the current lockdown.
But – secondly, and just as importantly, the climate emergency is not going away, and will return to the top of the BoE’s agenda very soon, meaning vital plans at banks & insurers, must continue to be made.
Banks can’t afford to detract from planning for the key operational priorities now, as the importance of climate risk to banks and their clients will only continue to grow.
Many commentators are currently talking about a new normal, or as McKinsey call it – a next normal. The climate emergency and the transition to the low carbon economy will feature heavily in boardroom plans as banks plan for what this next normal will look like. Banks can’t afford to detract from planning for the key operational priorities now, as the importance of climate risk to banks and their clients will only continue to grow.
The impact of climate risk and the successful transition to a low carbon economy will be the next normal for how the global finance industry must be rewired to operate. BoE stress tests will be implemented – and this is going to mean people, processes and technology need to be recalibrated to ensure banks are resilient and can meet new key performance indicators.
The global transition to a low carbon economy means getting ahead of and planning for a moment in time, which will be crucial to how banks and insurers operate successfully in the future. The ability to plan for today’s challenges – and have one eye on what is coming down the road, means board-level leadership teams at banks needs to be all over the key data and metrics which will define future success.
The ability to pivot operations, plans, forecasts and teams in response to new stress test metrics will dictate the finance industry leaders who will thrive in the future and demonstrate real leadership.
A move to digital boardrooms will drive this new operational mindset. CXO leaders at forward-thinking banks will want the latest data-driven metrics in front of them in real-time, so they can see and report back on how their bank is progressing on the road to a transitioning and complying with new low carbon economy KPIs.
Executive leaders across the financial services industry will expect to be able to respond to the changing business agenda by accelerating their most important decision-making through genuine digital transformation.
Take, for example, a board meeting where a bank’s business strategy is being discussed and which direction the bank should take to respond to new legislation relating to the new low carbon economy. With multiple routes available, how should a decision be made? A digital boardroom will provide the answer.
Such a decision-making platform allows anyone in the room to perform complex scenario modelling and build strategic plans as they go and discuss potential outcomes with data. A bank or insurer considering the development of a new way of working to comply with new stress tests focused on their resilience, needs to answer a number of questions before moving forward – what and where are the resources needed to step-up? Will the new transition require investment in people? Would it be more economical to hire additional staff, upskill existing employees or outsource certain aspects completely? What is the impact of other potential shifts in the economy in future?
Today’s turbulent environment means executive leaders at finance organisations must be able to plan, adapt and react with speed. Data silos across the organisation must be broken down, to gain a holistic view of banks’ performance in line with the BoE’s new stress tests. Connecting banks’ operational planning activities, joining-up functional transparency, and enabling the accurate simulation and testing of scenarios in digital boardrooms has never been greater in order to comply with the new stress tests that we know will arrive at some point soon.