Key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change

1: Executive summary

The Bank runs regular stress tests to help assess the resilience of the UK financial system and individual institutions. There are two types of exercise within the Bank’s concurrent stress-testing framework for banks and building societies (hereafter ‘banks’): annual solvency stress tests; and biennial exploratory scenarios. The Bank also runs stress tests on a periodic basis for a number of insurance firms.

Running biennial exploratory scenarios allows policymakers to probe the resilience of the UK financial system to a wide range of risks, and is a tool to enhance participants’ strategic thinking on how to manage those risks. The 2021 exercise explores the resilience of the largest UK banks and insurers to the physical and transition risks associated with climate change.

The desired outcomes of the 2021 Climate Biennial Exploratory Scenario (CBES) are to:

• Size the financial exposures of participants and the financial system more broadly to climate-related risks.
• Understand the challenges to participants’ business models from these risks; and gauge their likely responses and the implications for the provision of financial services.
• Assist participants in enhancing their management of climate-related financial risks. This includes engaging counterparties to understand their vulnerability to climate change.

The Bank intends for the CBES to be a learning exercise. Expertise in modelling climate-related risks is in its infancy, so this exercise will develop the capabilities of both the Bank and CBES participants.

The CBES will explore the vulnerability of current business models to future climate policy pathways and the associated changes in global warming. In doing so, it will help to identify the potential risks posed to those business models over time. To do this, participants will measure the impact of the scenarios on their end-2020 balance sheets, which represents a proxy for their current business models. For banks, the CBES focuses on the credit risk associated with the banking book, with an emphasis on detailed analysis of risks to large corporate counterparties. For insurers, the CBES will focus on changes in Invested Assets (and Reinsurance Recoverables) and Insurance Liabilities (including accepted Reinsurance).

The CBES will also explore how firms intend to adapt their business models over time, in light of climate changes. The exercise also covers the management actions participants would anticipate taking in the published scenarios; as well as participants’ present and future planned approaches to managing climate risk.

The exercise will not be used by the Bank to set capital requirements, and individual participants’ projected losses will not be tied directly to actions participants are required to take. Instead, participants’ submissions may inform the Financial Policy Committee’s (FPC’s) approach to system-wide policy issues; the Prudential Regulation Authority’s (PRA’s) approach to supervisory policy; and guide further work between participants and supervisors to address any issues highlighted.

The CBES uses three scenarios to explore the two key risks from climate change: the risks that arise as the economy moves from a carbon-intensive one to net zero emissions – transition risks; and risks associated with the higher global temperatures likely to result from taking no further policy action – physical risks. All three scenarios explore both transition and physical risks, to a different degree.

The CBES scenarios are not forecasts of the most likely future outcomes. Instead, the scenarios are plausible representations of what might happen based on different future paths of governments’ climate policies (policies aimed at limiting the rise in global temperature). Each scenario is assumed to take place over the period 2021–50.

The exercise considers two routes to net zero greenhouse gas emissions: an Early Action scenario and a Late Action scenario (Table 1.A). These scenarios primarily explore transition risks from climate change:

• Early Action: the transition to a net-zero economy starts in 2021 so carbon taxes and other policies intensify relatively gradually over the scenario horizon. Global carbon dioxide emissions are reduced to net-zero by around 2050. Global warming is limited to 1.8°C by the end of the scenario (2050) relative to pre-industrial levels. Some sectors are more adversely affected by the transition than others, but the overall impact on GDP growth is muted, particularly in the latter half of the scenario once a significant portion of the required transition has occurred and the productivity benefits of green technology investments begin to be realised.
• Late Action: The implementation of policy to drive the transition is delayed until 2031 and is then more sudden and disorderly. Global warming is limited to 1.8°C by the end of the scenario (2050) relative to pre-industrial levels. The more compressed nature of the reduction in emissions results in material short-term macroeconomic disruption. This affects the whole economy but is particularly concentrated in carbon-intensive sectors. Output contracts sharply in the UK and international economies. The rapid sectoral adjustment associated with the sharp fall in GDP reduces employment and leads to some businesses and households not being able to make full use of their assets, with knock-on consequences for demand and spending. Risk premia rise across multiple financial markets.

The No Additional Action scenario primarily explores physical risks from climate change. Here, there are no new climate policies introduced beyond those already implemented. The absence of transition policies leads to a growing concentration of greenhouse gas emissions in the atmosphere and, as a result, global temperature levels continue to increase, reaching 3.3°C relative to pre-industrial levels by the end of the scenario.^{footnote [1]} This leads to chronic changes in precipitation, ecosystems and sea-level. There is also a rise in the frequency and severity of extreme weather events such as heatwaves, droughts, wildfires, tropical cyclones and flooding. There are permanent impacts on living and working conditions, buildings and infrastructure. UK and global GDP growth is permanently lower and macroeconomic uncertainty increases. Changes in physical hazards are unevenly distributed with tropical and subtropical regions affected more severely. Many of the impacts from physical risks are expected to become more severe later in the 21^st century and some will become irreversible. So the headwinds facing the economy would be expected to increase further into the future.

The CBES scenario specification builds upon a subset of the Network for Greening the Financial System (NGFS) climate scenarios. NGFS climate scenarios aim to provide central banks and supervisors with a common starting point for analysing climate risks under different future pathways. They are produced in partnership with leading climate scientists, leveraging climate-economy models that have been widely used to inform policymakers, and have been used in key reports.^{footnote [2]}

The Bank expects to publish CBES results in May 2022, following two rounds of participants’ submissions. Results might be published sooner if the Bank decides not to ask for the second round of submissions.

Figure 1.A: The 2021 Biennial Exploratory Scenario explores transition and physical risks from climate change

Summary of impacts in the CBES scenarios

Footnotes

• Sources: Met Office, Network for Greening the Financial System and Bank calculations.

2: Background

2.1: Biennial Exploratory Scenario

The Bank runs regular stress tests to help assess the resilience of the UK financial system and individual institutions. There are two types of exercise within the Bank’s concurrent stress-testing framework for banks and building societies: the annual solvency scenario and the biennial exploratory scenario (BES). The Bank also runs stress tests on a periodic basis for a number of insurance firms.

The BES allows policymakers to probe the resilience of the financial system to a wider range of risks than those closely linked to the financial cycle, and is a tool to enhance participants’ strategic thinking on how to manage different risks.

The 2021 exercise aims to test the resilience of the current business models of the largest banks and insurers, and the financial system to the physical and transition risks from climate change.

The 2021 BES includes both banks and insurers for the first time. By testing both banks and insurers using the same scenarios, this Climate Biennial Exploratory Scenario (CBES) will allow the Bank to explore the risks presented by climate change across the financial system more fully.

The CBES explores three different climate policy scenarios, which generate a range of possible future outcomes for global temperatures and the economy, each spanning 30 years.

Box A sets out differences between the CBES and the Bank’s annual solvency stress tests.

2.2: The Bank’s response to the financial risks from climate change

There are two sources of financial risks from climate change: the risks associated with actions to reduce greenhouse gas emissions – transition risks; and risks associated with the higher global temperatures likely to result from taking no further policy action – physical risks.

The financial risks from climate change affect the safety and soundness of firms the Bank regulates and the stability of the wider financial system that it oversees. Climate-related financial risks therefore have a direct impact on the delivery of the Bank’s macroprudential and microprudential policy objectives, as set out in relevant legislation and the respective remit and recommendation letters (remit letters) from Government to the Financial Policy Committee Opens in a new window and Prudential Regulation Committee Opens in a new window (PRC).

In addition, while the primary levers for driving an orderly economy-wide transition to net-zero emissions rest with governments (eg climate policy) and industry (eg innovation and investments), the Bank has a key supporting role to play as the Government develops and sets out its plans. This role was highlighted in the recent changes to the policy committees’ remit letters. The CBES contributes to this role by helping to assess the financial impacts of different possible temperature pathways and climate policy actions.

The CBES is one of the Bank’s workstreams aiming to ensure the financial system is resilient to climate-related financial risks. More detail on the Bank’s wider approach to managing climate-related risks can be found on its climate change webpage.

2.3: CBES objectives

The desired outcomes of the CBES are to:

• Size the financial exposures of participants and the financial system more broadly to climate‑related risks.
• Understand the challenges to participants’ business models from these risks; and gauge their likely responses and the implications for the provision of financial services. This includes investigating the interdependency between insurers and banks (such as the impact of potential changes in insurance provision on banks’ credit risk exposures and the impact of potential changes in bank lending on the value of insurers’ asset holdings).
• Assist participants in enhancing their management of climate‑related financial risks, consistent with expectations set out in Supervisory Statement 3/19 and the Dear CEO letter dated 1 July 2020. This includes embedding these risks in business as usual risk management, engaging counterparties to understand their vulnerability to climate change, and encouraging boards to take a strategic, long‑term approach to managing these risks.

The Bank intends for the CBES to be a learning exercise. Expertise in modelling climate-related risks is in its infancy, so this exercise will develop the capabilities of both the Bank and CBES participants. The CBES draws upon lessons learnt from the climate scenarios in the 2019 Insurance Stress Test and will help the Bank develop its approach to climate scenario analysis, both domestically and through international groups like: the Network for Greening the Financial System (NGFS); the International Association of Insurance Supervisors; the Sustainable Insurance Forum; and the Financial Stability Board. The results will enhance the Bank’s understanding of the financial stability implications of climate change and supplement supervisors’ knowledge of participants’ governance and climate‑related risk management.

The exercise will not be used by the Bank to set capital requirements. And individual participants’ projected losses will not be tied directly to actions participants are required to take. Instead, participants’ submissions may inform the FPC’s approach to system‑wide policy issues, the PRA’s approach to supervisory policy and guide further work between participants and supervisors to address any issues highlighted.

3: Key features of the CBES exercise

The CBES scenarios and guidance for participants have been calibrated and produced by Bank staff, under the guidance of the FPC and PRC.

3.1: Participation

Table 3.A lists the CBES participants. They are to report on a group consolidated basis unless otherwise stated.

3.2: Focus

The CBES will explore the vulnerability of participants’ current business models to future climate-policy pathways and associated degrees of global warming. In doing so, it will help to identify the potential risks posed to those business models over time. To do this, participants will measure the impact of the scenarios on their end-2020 balance sheets, which represents a proxy for their current business models. In general, the nominal size and composition of balance sheets are assumed to be fixed, and will be updated to account for mitigation and adaptation plans of counterparties only if they are already under way, and are highly likely to be completed.

For banks, the CBES focuses on the credit risk associated with the banking book, with an emphasis on detailed analysis of risks to large corporate counterparties. A key metric of that risk will be the cumulative total of provisions against credit-impaired loans at various points in the scenarios. Traded risk and non-traded market risk will be out of scope.

For insurers, the CBES will focus on changes in Invested Assets (and Reinsurance Recoverables), and Insurance Liabilities (including accepted Reinsurance) assuming an instantaneous shock. This means that the stress brings forward the future climatic environment to today’s balance sheet, with no allowance for changes in future premiums, asset allocation, expenses, reinsurance programmes and other future changes in participants’ business models.

In addition to sizing the financial risks from climate change, the exercise will explore how participants might change their business models to mitigate risk in the scenarios – their ‘management actions’. The CBES is also designed to enable the Bank to assess participants’ present and future planned approaches to managing climate risks. It will also explore risks from climate litigation. Some of this information will be captured via a questionnaire to be completed by participants. Details on data requirements and methodological approach are set out in guidance for participants Opens in a new window.

The Bank does not intend to disclose the results of individual firms. This reflects the exploratory nature of the exercise. Instead, the Bank anticipates disclosing system‑level results of the financial sector’s resilience to climate change, including highlighting the main sources of loss by sector and geography. It may also publish ranges of results across participants.

3.3: Timelines

The Bank expects to publish aggregated CBES results in May 2022.

Before the final results are published, the Bank expects to run a second round of the exercise, which would launch around the end of January 2022. A decision on the form and content of this second round will be based on analysis of participants’ initial submissions. The second round could focus, for example, on exploring particular potential interactions between participants’ responses. Should the Bank decide not to run a second round of the exercise, CBES results will be published before May 2022.

3.4: Overview of the scenarios

3.4.1: Conditioning assumptions

All climate scenarios are subject to significant uncertainty, both from estimating the precise extent of transition and physical risks resulting from the conditioning assumptions, and from estimating the impact of these risks on macroeconomic and financial variables.^{footnote [3]}

The CBES scenarios are not forecasts of the most likely future outcomes. Instead, the scenarios are plausible representations of what might happen based on different future paths of government climate policy (policy aimed at limiting the rise in global temperature).

All three scenarios explore both transition and physical risks, to a different degree.

The CBES considers two pathways to net zero greenhouse gas emissions: an Early Action scenario and a Late Action scenario. These scenarios primarily explore transition risks from climate change:

• Early Action: the transition to a net-zero emissions economy starts in 2021 so carbon taxes and other policies intensify relatively gradually over the scenario horizon. Global carbon dioxide emissions (and all greenhouse gas emissions in the UK) drop to net-zero around 2050.
• Late Action: the transition is delayed until 2031, at which point there is a sudden increase in the intensity of climate policy. In the UK, greenhouse gas emissions are successfully reduced to net-zero around 2050, but the transition required to achieve that is more abrupt and therefore disorderly.

The No Additional Action scenario primarily explores physical risks from climate change. In this scenario, no new climate policies are introduced beyond those already implemented prior to 2021.

The CBES scenario variable paths are available at the Bank Stress testing website.

The CBES scenarios are based on a subset of NGFS climate scenarios.^{footnote [4]} Building on the NGFS climate scenarios ensures that the CBES scenarios are grounded in a consistent set of pathways for physical climate change, the energy system, land-use and the wider economy. Specifically, the CBES scenarios take the NGFS Net Zero 2050, Delayed Transition and Current Policies scenarios as a starting point. The Bank has expanded on the NGFS scenarios by including additional risk transmission channels and adding additional variables (working with climate scientists, academics and industry experts).^{footnote [5]} As a result, the Climate BES scenarios are not identical to those produced by the NGFS, but they are consistent across many variables.

An important indicator of the level of transition risks in these scenarios is the carbon price. Transitioning away from fossil fuels and carbon-intensive modes of production requires significant investment in low-carbon alternatives in all sectors of the economy. Policymakers can induce this transition by increasing the implicit cost of emissions. The carbon price can be thought of as a summary of these policies, and so is closely linked to the extent of transition risk.

Throughout this document, the term carbon price is used to refer to a shadow price of all greenhouse gas emissions, ie the marginal abatement cost of an incremental tonne of emissions. The higher shadow price of emissions indicates a more stringent transition policy. This is a simplification, intended to capture a range of different transition policies. In reality, governments can adopt a mix of policies to reduce greenhouse gas emissions, which may include, for example, carbon taxes, cap-and-trade schemes, green subsidies and environmental regulations.

Differences in carbon prices across countries in the CBES scenarios reflect:

• Different opportunities for reducing emissions. For example, the amount of land and resources available for deployment of carbon dioxide removal technologies such as bioenergy with carbon capture and storage.
• Sectoral make-up of the economies, given some sectors are more reliant on carbon than others.
• The costs of reducing emissions in different regions. For example, the relative price of emissions-neutral electricity.

In the Early Action scenario, carbon prices increase from roughly US$30 per tonne of carbon dioxide-equivalent today, to just under US$900 by 2050 in the UK and EU (abstracting from general inflation over the time period).^{footnote [6]} In the Late Action scenario, carbon prices remain at US$30 until 2030, and then rise steeply to over US$1,000 in 2050. In the No Additional Action scenario, carbon prices do not rise (Chart 3.1).^{footnote [7]}

Chart 3.1: In the Early and Late Action scenarios, stringent climate policies are associated with a fall in carbon emissions to net zero in the UK and the EU; but in the No Additional Action scenario emissions fall only moderately ^(a)(b)

Footnotes

• Sources: Network for Greening the Financial System and Bank calculations.
• (a) Carbon price depicts a shadow price of greenhouse gas emissions, ie the marginal abatement cost of an incremental tonne of emissions. This is a simplification, intended to capture a range of different policies to reduce greenhouse gas emissions, which may include, for example, carbon taxes, cap-and-trade schemes, green subsidies and environmental regulations. ↩
• (b) As the No Additional Action scenario is calibrated based on temperature outcomes that might be observed in the period 2050–80, emissions over that later time period are also relevant. The calibration of No Additional Action scenario is consistent with combined UK and EU net carbon dioxide emissions of 922 megatonnes per year by 2080.

Changes in emissions, and the atmospheric concentration of greenhouse gases, translate through to changes in global mean temperatures. Global mean temperatures have already increased by around 1.1°C from pre-industrial levels.^{footnote [8]} In the Early and Late Action scenarios, carbon dioxide emissions globally (and greenhouse gas emissions in the UK) reach net-zero. Because of the significant lags between emissions and warming levels, temperatures continue to rise, reaching a global warming level of 1.8°C by this point (Table 3.B). The degree of warming is then projected to fall slightly from its peak in these scenarios to 1.6°C by the end of the century, due to actions (eg changes in land-use) that help to remove some greenhouse gases from the atmosphere.

Taking policy action sooner in the Early Action Scenario would mean that there was more chance of a lower peak temperature than in the Late Action Scenario.^{footnote [9]} As a prudent and simplifying assumption, however, the warming level incorporated is the same in the Early and Late Action scenarios. That means different degrees of transition risks alone will drive differences in the impact of these two scenarios.

In the No Additional Action scenario, global warming relative to pre-industrial times reaches 3.3°C by 2050. Climate scientists’ projections conditioned on no further policy action suggest, however, that temperature increases as significant as these would only be likely to occur later in the century. The shifting forward in time of these more severe temperature rises – and associated physical risks – is deliberate, as it will allow the Bank to explore the impact of these more extreme risks. Specifically, the calibration is based on climate outcomes that could materialise between 2050 and 2080 in the absence of further policy action, consistent with warming reaching 4.1°C by the end of the century.

The temperature pathway used in this scenario is based on the 90th percentile of the projected distribution of warming outcomes conditional on further policy inaction. The Bank has made this calibration choice in recognition of the large degree of uncertainty surrounding temperature pathways, as well as the modelling uncertainty related to physical risks, including the difficulty of modelling potential developments such as conflict and mass migration, which do not feature in the calibration.

The amount of carbon sequestration (removing carbon from the atmosphere and its long-term storage) is a key assumption in the CBES scenarios.^{footnote [10]} At present, carbon sequestration technologies face challenges in terms of investment and deployment. Reflecting that, the Early Action scenario assumes only a moderate level of sequestration can be achieved by private and public investment in this area. Both the Late Action and No Additional Action scenarios assume low levels of carbon sequestration, in the absence of timely and sizable investments in carbon sequestration technologies.

3.4.2: Summary of risks and impacts

Transition risks affect the profitability of businesses and wealth of households. They also affect the broader economy through investment, productivity and relative price channels. This is particularly the case if the transition forces businesses and households to stop using some of their assets before the end of their productive lives, leading to an increase in stranded assets.

In the Early Action scenario, the transition starts in 2021 so carbon prices (ie carbon taxes and other policies incentivising the reduction of emissions) increase relatively gradually over the scenario horizon, reaching around US$900 (abstracting from general inflation over the time period^{footnote [11]}) in the UK by the end of the scenario (Figure 3.A). As in the NGFS Net Zero 2050 scenario, the reduction in greenhouse gas emissions occurs gradually across multiple sectors. This is achieved by decarbonising energy supply, accelerating electrification and switching to low-carbon fuels in industry, transport and buildings, as well as some carbon sequestration.

In the Late Action scenario, the transition is delayed for ten years. There could be many potential triggers for such a shift. For example, a cumulative increase in significant climate-related events could materially strengthen the impetus for government action worldwide. Because the transition is delayed for ten years, it has to happen faster than in the Early Action scenario to ensure carbon dioxide emissions drop to net-zero.^{footnote [12]} It is also disorderly, requiring unexpected and urgent changes in the behaviour of households and businesses. A sharp rise in carbon prices leads businesses to abandon otherwise productive assets, reduce employment in emissions-intensive activities, and invest in green alternatives. This leads to a short-term drop in output as businesses adjust their business models. Because the supply of energy is fixed in the short-to-medium term, this drives inflationary pressures in raw materials, goods and services.

The No Additional Action has little transition risk, but the level of warming leads to material changes in physical perils. Physical risks affect the economy via:

• Acute risks from the increasing frequency and severity of extreme weather events such as heatwaves, droughts, tropical cyclones and floods.
• Chronic risks^{footnote [13]} (from increased average temperatures, sea level rise and higher precipitation). For example, sea level rises by 0.4m in the UK by the end of the scenario.

Both sources of risk can impact living and working conditions, buildings, infrastructure and agriculture. This will affect all households and businesses in the economy, albeit to a varying degree depending on their exposure, vulnerability and ability to adapt.

The CBES will help the Bank to analyse the potential impact of transition scenario variables (eg carbon prices) and physical scenario variables (eg sea level rises) on losses faced by participants. These direct climate variables are expected to play an important role in determining the total impact of the scenarios. Macroeconomic scenario variables (eg GDP) will also have some impact, especially in the Late Action scenario.

The macroeconomic impacts of transition risks is modest at an aggregate level in the Early Action scenario, as the effects of higher carbon prices and energy costs are mostly offset by energy efficiency improvements and distributional effects of these policy measures.

GDP growth is more severely affected in the Late Action scenario. This is due to a rapid sectoral adjustment affecting the labour market and leading to stranded assets, with knock-on consequences for demand and spending, and a rise in risk premia on many assets.

In the No Additional Action scenario, physical risks lead to a material and permanent reduction in the GDP growth rate. Many of the impacts from physical risks are expected to crystallise or become more severe in a non-linear way towards the end of the 21^st century, so the negative impact on GDP associated with the No Additional Action scenario would be expected to increase with time, well beyond the scenario horizon.^{footnote [14]}

The macroeconomic impacts from physical risks would be even higher if societal changes like migration and conflict were to rise, although these are out of scope of the NGFS and CBES scenarios.

Figure 3.A: The 2021 Biennial Exploratory Scenario explores transition and physical risks from climate change

Summary of impacts in the CBES scenarios

Footnotes

• Sources: Met Office, Network for Greening the Financial System and Bank calculations.

4: Detailed description of the CBES scenarios

4.1: Transition risks

4.1.1: Transition policies and the impact on emissions

In the Early Action scenario, climate policies are enacted in 2021. As a result, carbon taxes and other policies intensify relatively gradually over the scenario horizon. As in the NGFS Net Zero 2050 scenario, global carbon dioxide emissions drop to net-zero before 2050 (Chart 3.1). The reduction in emissions occurs gradually across multiple sectors. This is achieved by: decarbonising the energy supply; accelerating electrification; switching to low-carbon fuels in industry, transport and buildings; and reducing agricultural emissions. Carbon sequestration also increases modestly. Some jurisdictions such as the UK, US, EU and Japan reach net-zero for all greenhouse gases by 2050, whereas some other economies are assumed to take slightly longer to transition.

The Late Action scenario involves a sudden increase in the intensity of climate policy in 2031, following an initial period which despite global focus on climate issues, is characterised by insufficient or ineffective emissions reducing policies. There are many hypothetical triggers for such a shift. For example, a cumulative increase in significant climate-related events could materially strengthen the impetus for government action worldwide. Because the transition is delayed for 10 years, it must be more sudden to ensure that UK carbon dioxide emissions drop to net-zero before 2050.

4.1.2: Phase-out of fossil fuels

Transition policies lead to the phase-out of fossil fuels. This is associated with changes in overall energy use as well as by changes in the energy mix reducing the carbon intensity of energy.

In the Early and Late Action scenarios, fossil fuels are almost entirely replaced by renewables in the UK primary energy mix by 2050 (Chart 4.1).^{footnote [15]} By then, renewables account for around 90% of UK energy needs and around 70% of global energy needs. The main reason for a lower proportion globally is higher demand for fossil fuels in developing regions. In these regions the development of infrastructure remains fossil-fuel intensive because there is not enough time within the scenario horizon to complete the transition to low-carbon production processes for items such as cement and steel.

The phase-out of fossil fuels occurs alongside significant improvements in energy efficiency, as well as changing regulation and user preferences. For example, in the Early Action and Late Action scenarios the UK Government introduces policies to improve energy efficiency of buildings and to advance a transition towards electric vehicles (see Box B for more details). The implications vary by sector (see Section 4.3.4: Sectoral differences).

Significant investment is needed to lower the cost and increase the deployment of low-carbon technologies. Transitioning to a net-zero economy requires investment flows to be channelled towards green electricity and storage, transport and industrial processes. It also requires investment in some carbon capture and storage for hard-to-abate emissions such as from aviation and animal agriculture. This shift takes place more rapidly in the Late Action scenario due to the delayed policy response and reduced availability of carbon sequestration technologies.

Without further policy intervention, in the No Additional Action scenario, fossil fuels continue to be the dominant source of primary energy, accounting for around 60% of the UK and 75% of the global primary energy mix in 2050.

Chart 4.1: In the Early and Late Action scenarios fossil fuels are almost entirely replaced by renewable energy in the UK

UK primary energy mix

Footnotes

• Sources: Network for Greening the Financial System and Bank calculations.

4.1.3: Commodity markets

One key uncertainty associated with transition is the future pathway for volumes and producer prices of fossil fuels.

In the No Additional Action scenario, global wholesale commodity prices (producer prices) rise in line with global demand and increasing extraction costs (Chart 4.2). In the Early Action and Late Action scenarios, producer fossil fuel prices are under downwards pressure from declining fossil fuel use, although producer ‘sell-off’ behaviour is not explicitly modelled. Lower producer prices of fossil fuels have a negative impact on businesses that extract fossil fuels, including those that are state-owned enterprises (see Section 4.3 for an overview of the impact on sovereign bond spreads). Rising carbon prices in the Early Action and Late Action scenarios create a wedge between consumer and producer prices.

Chart 4.2: In the Early Action and Late Action scenarios producer prices of fossil fuels fall, but rising carbon prices create a wedge between producer and user prices

Producer and user fossil fuel prices

Footnotes

• Sources: National Institute of Economic and Social Research, Network for Greening the Financial System and Bank calculations.

4.2: Physical risks

Global mean temperatures have already increased by around 1.1°C from pre-industrial levels. In the Early and Late Action scenarios where deep reductions in emissions occur, changes in physical risks still materialise as the atmospheric concentration of greenhouse gases continues to increase. However, their impact is much smaller than in the No Additional Action.

In the No Additional Action scenario, governments around the world fail to meet their climate ambitions, with global temperatures increasing by 3.3°C relative to pre-industrial levels by the end of the scenario. This leads to severe and irreversible physical impacts. Chronic risks increase due to: rising temperatures, precipitation and sea level and due to changes in ecosystems. Acute risks also increase as the frequency and severity of weather events such as heatwaves, wildfires, tropical cyclones and flooding rise. Chronic and acute physical risks impact living and working conditions, affecting health, labour productivity and agriculture.^{footnote [16]} Changes in physical hazards are unevenly distributed, with tropical and subtropical regions facing larger increases than higher latitudes.^{footnote [17]}

The following sections discuss selected physical risk variables in the CBES scenarios and describe flood defence assumptions (Section 4.2.5).

4.2.1: Key physical risks in the UK

In the UK, climate change is expected to increase average temperature, increase precipitation in the winter months, reduce precipitation in the summer months, and cause sea level to rise.^{footnote [18]}

The combination of climate change effects incorporated in the No Additional Action scenario leads to an increased risk of flooding in the UK. In addition, the UK also becomes more exposed to hazards such as subsidence and heatwaves.^{footnote [19]}

By the end of the No Additional Action scenario, average winter precipitation in the UK increases by 25% compared to the late 20th century (Chart 4.3). Contributing to those average increases, extreme rainfall events also become more frequent. For example, Met Office research found that events similar to the record rainfall that occurred in the UK on 3 October 2020 (the UK’s wettest day on record) could become ten times more frequent for climatic conditions similar to those in year 10 of the No Additional Action scenario.

Chart 4.3: In the No Additional Action scenario, average winter precipitation in the UK rises by nearly 25% compared to the late 20th century

Change in the average summer and winter precipitation since the late 20th century in the CBES scenarios

Footnotes

• Sources: Met Office and Bank calculations.

Sea level rise also contributes to the risk of coastal flooding in the UK, with the mean sea level 0.4 metres higher by the end of the No Additional Action scenario than in the late 20th century (Chart 4.4).

Chart 4.4: In the No Additional Action scenario, mean sea level rise in the UK reaches nearly 0.4m

Mean sea level rise for the UK since 1981–2000 ^(a)

Footnotes

• Sources: Met Office and Bank calculations.
• (a) In the No Additional Action scenario, there is a level shift immediately at the beginning of the scenario from sea-level rise consistent with today’s warming level of 1.1°C to that consistent with a warming level of 2.3°C. 2.3°C is a level of warming that could plausibly be observed by the middle of the century, assuming no additional climate policy. ↩

4.2.2: Precipitation and flooding across the globe

The rise in temperatures leads to materially increased average precipitation rates in many regions across the world (eg in North America and East Asia) in the No Additional Action scenario (Table 4.A). Changes in precipitation lead to changes in river discharge, increasing the risk of inland floods from heavy precipitation. This risk can be measured using annual maximum discharge (water flow) in a river or catchment. Regions that experience the largest change in annual maximum discharge in the No Additional Action scenario are typically located in mid-latitudes. For example, by the end of the No Additional Action scenario, annual maximum discharge in China increases by 22%.

By contrast, some countries experience an overall decrease in average precipitation in the No Additional Action scenario. In France, mean annual precipitation falls by close to 4%, and summer precipitation falls by 20% by the end of No Additional Action scenario. Lower precipitation leads to lower river discharge. In Southern Europe, the annual maximum discharge decreases by over 30% by the end of No Additional Action scenario. This could adversely impact water supply and agricultural production.^{footnote [20]}

4.2.3: Sea level rise across the globe

Climate change is causing sea levels to rise via thermal expansion of ocean water and melting of ice sheets and glaciers. Global mean sea level has risen about 0.2 metres since 1880.^{footnote [21]} For example, in China, France, Japan and Hong Kong, the mean sea level increases by around 0.4–0.5 metres by the end of the No Additional Action scenario. Sea level rise is a contributing driver to increased coastal flood risk.

4.2.4: Tropical cyclones across the globe

Climate change affects the frequency and severity of tropical cyclones which varies across geographies and climatic scenarios. Tropical cyclones can have significant impacts on physical infrastructure and the supply chain, for example via damaging wind, storm surge and excess rainfall.

CBES scenario variable paths do not include detailed variables for the severity of tropical cyclones in each of the scenarios. However, the rise in temperatures is expected to lead to a significant increase in the frequency of severe tropical cyclones in certain regions in the world across the full duration of the No Additional Action scenario; and towards the end of the Early and Late Action scenarios.

Chart 4.5 illustrates the change in the frequency and severity of tropical cyclones for global warming conditions that are broadly similar to those at the end of the Early and Late Action scenarios or at the start of the No Additional Action scenario, when global warming levels relative to pre-industrial times are around 2°C (based on Knutson et al (2020)).^{footnote [22]} CBES participants can use this research as a starting point of their analysis when performing scenario expansion and quantifying impacts from tropical cyclones across the three scenarios. Participants should note that at approximately this point in the respective scenarios:

• Tropical cyclone precipitation rates are projected to increase by 14% globally, and by 16% in the North Atlantic basin.
• Tropical cyclone intensity is projected to increase by 5% globally, and by 3% in the North Atlantic basin.
• Global frequency of very intense tropical cyclones (category 4–5 storms) that tend to drive property damage is also projected to increase (while the overall expected frequency of tropical cyclones falls). In the North Atlantic basin, the frequency of very intense cyclones is expected to increase by 12%.

The frequency and severity of tropical cyclones at the end of the No Additional Action scenario (with global temperature warming of 3.3°C) is expected to be higher still. Participants may base their scenario expansions on their own model outputs or could adopt other approaches, such as scaling key variables according to warming levels.

Chart 4.5: Frequency of severe tropical cyclones increases significantly in certain regions across the full duration of the No Additional Action scenario and towards the end of the Early and Late Action scenarios

Tropical cyclone projections (2°C global warming) ^(a)

Footnotes

• Source: Knutson, T, Camargo, S J, Chan, J C L, Emanuel, K, Ho, C H, Kossin, J, Mohapatra, M, Satoh, M, Sugi, M, Walsh, K and Wu, L (2020), ‘Tropical Cyclones and Climate Change Assessment: Part II: Projected Response to Anthropogenic Warming Opens in a new window’.
• (a) The figure shows median and percentile ranges for projected percentage changes in tropical cyclone frequency, category 4–5 storm frequency, tropical cyclone intensity, and tropical cyclone near-storm rain rate. For tropical cyclone frequency, the 5th–95th percentile range across published estimates is shown. For category 4–5 storm frequency, tropical cyclone intensity, and tropical cyclone near-storm rain rates the 10th–90th percentile range is shown. ↩

4.2.5: Heatwave across the globe

Research shows strong evidence that climate change is increasing the risk of heatwaves. Across the globe, hot days are getting hotter and more frequent.^{footnote [23]} The increased risk of heatwaves increases the risk of widespread drought, crop failures, and wildfires; and it reduces labour productivity. In the No Additional Action scenario, land area exposed to heatwaves increases by more than 25%, with significant variation across regions (Table 4.B).^{footnote [24]} For instance, land area exposed to heatwave in Hong Kong increases by nearly 70% by the end of the No Additional Action scenario.

4.2.7: Adaptation and mitigation

The effects of climate-related risks can be partly reduced by climate adaptation and mitigation measures. For example, flood defences and improved national responses to natural disaster can help reduce the impacts of physical risks; just as pre-emptive reductions in reliance on carbon-intensive methods of production can limit transition risks. As a general rule, when participants analyse the impact of the scenarios on specific government or corporate counterparties, only those adaptation and mitigation plans that are already being implemented and that are highly likely to be completed will be factored into headline loss estimates.^{footnote [25]}

As an exception to this general rule, the CBES scenarios provide a specific path for UK flood defences. Existing flood defences are complex systems that provide a certain standard of protection to parts of the floodplain affected by flood risk. The response of flood risk management plans is expected to vary in the future across different floodplains. The CBES scenarios make a simplifying assumption of a single flood defence management strategy across the UK. In particular, the existing processes and structures are assumed to:

• be maintained to defend against increased flood severity (ie probability of failure maintained to current level); and
• not be upgraded (eg cannot justify that new structures like the Thames flood barrier are to be constructed nationally).

Given these assumptions, the standard of protection provided by existing flood defences will deteriorate as the risk of floods increases. The reduction in standard of protection will be a function of localised flood risk characteristics. Table 4.C provides an indication of the potential change in standard of protection under the different climatic conditions explored in CBES.

4.3: Macroeconomic impacts

4.3.1: Macroeconomic impacts in the Early Action scenario

In the Early Action scenario, there is an orderly transition. As in the corresponding NGFS scenario, the macroeconomic impact of transition risks is modest at an aggregate level, as the effects of higher carbon prices and energy costs are mostly offset by energy efficiency improvements and distributional effects of these policy measures. GDP growth remains positive, despite the overall headwinds from the transition. But there are material differences in sectoral impacts (see Section 4.3.4).

UK GDP growth dips temporarily, to an average of 1.4% between 2026–30, and recovers to around 1.6% by the end of the scenario. By 2050, the level of UK GDP is around 1.4% below a (purely hypothetical) counterfactual path in which there are no additional headwinds from climate risks.^{footnote [26]} There is little impact on the unemployment rate in this scenario.

Similarly, the level of global GDP is around 1.6% below the counterfactual by the end of the scenario. And there is little variation by country (Table 4.D).

The main drivers of UK and global GDP profiles in the Early Action scenario are:

• Shock to the supply capacity of the economy from rising carbon prices and changes in energy usage: in the short term, changes in the cost of energy and fossil fuels bear down on corporate profits in some sectors.
• Productivity improvements, including from energy efficiency: increased renewable energy investment is assumed to result in energy efficiency gains.^{footnote [27]}

Short and long-term interest rates rise gradually in the UK and in other major economies, with some of that increase reflecting the effect of the higher levels of investment needed to address risks from climate change. However, throughout the scenario, rates remain below the levels experienced before the global financial crisis, and there are assumed to be no abrupt changes in interest rates as the economy transitions. Relative to their end-2020 levels, UK 10-year sovereign bond yields rise by around 2.2 percentage points by the end of the scenario.

UK house prices grow at a somewhat slower rate than they would have done without the projected impact of climate risks in the scenario, leaving the level of aggregate UK house prices 7% lower than the counterfactual by the end of the scenario. The prices of certain types of properties will be more adversely affected than this, reflecting, for example, the impact of specific transition policies (see Box B for more details on the transition policies in the UK).

4.3.2: Macroeconomic impacts in the Late Action scenario

A sharp, unanticipated increase in shadow carbon prices in 2031 reduces the supply capacity of the economy. There are material reductions in the output of some industries, with workers in badly affected (carbon-intensive) sectors displaced, and unable to transfer to other sectors in the short term. Some businesses and households have to stop using some of their assets before the end of their productive lives. There are knock-on consequences for demand, and a rise in risk premia on many assets.

For the UK, the peak GDP impact relative to the counterfactual is around -8% in 2033 (Chart 4.6). The annual GDP growth rate troughs at -2.7%.

The unemployment rate peaks at 8.5%. The inflation rate rises to over 4%, but Bank rate is cut to 0.1%, as monetary policy is loosened in order to stabilise output.

GDP in other countries follow broadly similar paths, with some differences in specific country profiles reflecting differences in the macroeconomic impact of climate policy (eg relating to carbon intensity of production, among other things) and exposure to physical risks.

Chart 4.6: There is a sharp fall in GDP in the Late Action scenario

GDP in the Late Action scenario relative to the counterfactual ^(a)

Footnotes

• Sources: Network for Greening the Financial System and Bank calculations.
• (a) Even though the exact size and nature of risks from climate change is uncertain, some combination of physical and transition risks will materialise in the future with a high degree of certainty. The counterfactual pathways that might be expected in the absence of climate risks are therefore purely hypothetical. These counterfactual pathways do not represent the Bank’s view of the long-run path for the economy. ↩

The main drivers of UK and global GDP profiles in the Late Action scenario are:

• A shock to the supply capacity of the economy from rising carbon prices and changes in energy usage. This shock is similar to but more severe than in the Early Action scenario.
• Capital stranding, as businesses are no longer allowed to use their carbon-intensive assets or it is otherwise not profitable to use them given the carbon price.^{footnote [28]}
• Falling labour force participation. Non-carbon intensive sectors are assumed to have limited capacity to absorb the reduction in employment from carbon-intensive sectors. In the UK, for example, this results in a loss of around 1.5 million jobs overall, comparable with the 1980s recession.
• Temporarily lower productivity. Carbon-intensive sectors are assumed to have limited ability to adapt structures and processes in the short term, while non-carbon intensive sectors operate below capacity.

Rising risk premia on many assets rising to a peak similar to that in the global financial crisis.

From 2031 until around 2035 GDP growth averages close to zero, structural unemployment remains very high, and inflationary pressures remain strong, driven by energy and food prices. Risk premia remain elevated, depressing investment.

UK GDP growth then recovers, reaching around 1.6% annually. By the end of the scenario, the level of GDP is 4.6% lower than the counterfactual, with other major economies experiencing similar shortfalls.

UK aggregate house prices in the scenario fall by 19% peak-to-trough in absolute terms. As in the Early Action scenario, prices of certain types of properties will be more adversely affected than this, reflecting the impact of specific transition policies (See Box B for more details on the transition policies in the UK).

Over the course of the whole scenario, short and long-term interest rates rise in the UK and other major economies, with some of that increase reflecting the effect of higher levels of investment needed to address risks from climate change. However, when the disorderly transition begins in 2031, the macroeconomic disruption causes financial market participants’ perceptions of risk to increase, and their risk appetite to diminish. The resulting rise in risk premia leads to an upward pressure on interest rates.

This is reflected in higher borrowing rates faced by households, companies and governments (Table 4.E). The rise in sovereign bond yields in 2031 is most pronounced in those economies with substantial fossil fuels exports.

Following the onset of the disorderly transition, monetary authorities across the world are assumed to cut policy rates in this scenario, and to keep them low for several years. Although the inflation rate rises as a result of some of the climate policies that are imposed, the scenario assumes that a substantial margin of spare capacity opens up in the world economy, which takes many years to eliminate despite support from monetary policy.

Credit spreads rise in a number of markets. For example, in 2031, BBB-rated corporate bond spreads for non-financial companies rise by around 100 basis points in the UK and by around 110 basis points in the US.

Equity prices also fall in the scenario, with the peak-to-trough correction of close to 20% in the UK and in the US.

Corporate bond spreads and equity prices of individual businesses will vary around the values for aggregate indices, depending on the exposure of individual businesses to transition risks. CBES participants will consider that as part of the counterparty-level analysis, which is an important part of the exercise.

Measures of market volatility also rise, with the VIX rising from 19 in 2030 to 30 in 2031, an annual average level only a little below that observed during the global financial crisis.

4.3.3: Macroeconomic impacts in the No Additional Action scenario

The more severe physical risks in the No Additional Action scenario result in a material cumulative impact on GDP. This impact on output manifests in slightly lower trend growth rather than a period of sharp contraction.

UK GDP only grows at an average rate of around 1.4% in years 6–10 of the scenario, with the growth rate falling further to around 1.2% towards the end of the scenario. After 30 years, the level of UK GDP is around 8% below the level it hypothetically might have been in the absence of climate risks (Chart 4.7).

The impacts of physical risks on GDP are even more severe globally. The impact on individual countries depends on their exposures to physical risks. For example, Chinese GDP is around 15% lower relative to the counterfactual after 30 years; and global GDP is around 13% lower relative to the counterfactual.

Chart 4.7: Severe physical risks in the No Additional Action scenario result in a material cumulative impact on GDP

GDP in the No Additional Action scenario relative to the counterfactual ^(a)

Footnotes

• Sources: Kalkuhl and Wenz (2020) Opens in a new window, Network for Greening the Financial System and Bank calculations.
• (a) Even though the exact size and nature of risks from climate change is uncertain, some combination of physical and transition risks will materialise in the future with a high degree of certainty. The counterfactual pathways that might be expected in the absence of climate risks are therefore purely hypothetical. These counterfactual pathways do not represent the Bank’s view of the long-run path for the economy. ↩

The main drivers of UK and global GDP profiles in the No Additional Action scenario are:

• Falling productivity. Changes in temperature and humidity weigh on labour and agricultural productivity, especially in developing countries. Weaker productivity results in lower potential output growth in the long run.^{footnote [29]}
• Damage to capital. A higher frequency and severity of extreme weather events increases damages to the physical capital stock, including the housing stock, and further lowers productivity.
• Supply chain disruption.
• Falling trade volumes. This reduces diffusion of ideas and expertise, resulting in a knock-on impact on UK productivity.

The UK inflation and unemployment rates are little changed from the counterfactual by the end of the scenario, because of the gradual nature of the macroeconomic impact over the scenario horizon.

Aggregate UK house prices fall gradually relative to the counterfactual, with the cumulative impact of -22% by the end of the scenario. But some property prices are much more adversely affected, for example those properties that become heavily flooded on a regular basis.

Short and long-term interest rates rise gradually in the UK and in other major economies. However, throughout the scenario, rates remain below the levels experienced before the global financial crisis. Risk premia are assumed to rise over the course of the scenario, adding upward pressure on longer-term interest rates. That reflects a rise in macroeconomic and monetary policy uncertainty. Thus, borrowing rates faced by households, companies and governments rise over the course of the scenario (Table 4.E).

Government bond yields rise more in countries with larger exposures to physical risks. For example, in the emerging market economies 10-year sovereign bond yields rise by an average of over 5 percentage points over the course of the scenario, reaching around 9.2%. This estimate is indicative, and CBES participants will perform scenario expansion to consider the impact of physical risks on sovereign credit risks in different countries.

Corporate credit spreads rise in a number of markets. For example, by the end of the scenario BBB-rated corporate bond spreads for non-financial businesses rise by around 110 basis points in the UK and by around 160 basis points in the US.

Corporate bond spreads and equity prices of individual businesses will vary around the values for aggregate indices, depending on the exposure of individual businesses to physical risks. CBES participants will consider that as part of the counterparty-level analysis.

Macroeconomic uncertainty faced by households and companies increases as the physical environment becomes more hazardous and unpredictable. Measures of market volatility also trend upward in the scenario, with the VIX rising by around 50% from its 2021 level.

Assuming trends at the end of the scenario are maintained, in another 30 years, UK GDP in the No Additional Action scenario would be 16% below the counterfactual level. But many of the impacts from physical risks are expected to crystallise or become more severe in a non-linear way over time. So headwinds facing the economy would be expected to increase further into the future, beyond the horizon of this exercise. This is in sharp contrast to the Early and Late Action scenarios, where most of the economic impacts from the transition are felt by the end of the scenario.

The macroeconomic impacts from physical risks could be even higher if adverse societal changes like increased mass migration and conflict were to materialise, although these are out of scope of the NGFS and CBES scenarios.

4.3.4: Sectoral differences

The degree of exposure to climate risks varies across different sectors of the economy. This is reflected in the calibration of Gross Value Added (GVA) paths for individual sectors within the CBES scenarios. For instance, sectors relying on carbon-intensive production processes are more vulnerable to transition risks than the economy as a whole. And sectors that are highly dependent on physical infrastructure in certain areas could be more vulnerable to physical risks. The magnitude of a sector’s exposure also depends on factors such as its core activity, supply chain structure, and the extent of emissions associated with the final consumption of its goods and services. To aid participants with their sectoral analysis, CBES scenario variable paths provide sectoral GVA paths for 59 UK sectors, spanning the entire economy, in each scenario.^{footnote [30]} These paths reflect the value of goods and services produced by each sector, and are expected to have a material impact on the results of the exercise. ^{footnote [31]}

There is a wide dispersion of sectoral shocks (Chart 4.8). While some sectors gain market share relative to others, all sectors are assumed to reduce their output relative to their counterfactual paths in which there are no headwinds from climate risks. This is because overall economic output is smaller in each scenario than in the counterfactual. But that does not rule out the possibility that there could be individual companies within sectors which might observe stronger than trend output under the scenarios.

Chart 4.8: The impact of climate risks varies markedly across different sectors

Range of UK sectoral Gross Value Added pathways: deviation from the counterfactual ^(a)

Footnotes

• Sources: Burke et al (2015) Opens in a new window, Exiobase, Met Office, Moody’s ESG Database Opens in a new window, Office for National Statistics, Organisation for Economic Co-operation and Development and Bank calculations.
• (a) Even though the exact size and nature of risks from climate change is uncertain, some combination of physical and transition risks will materialise in the future with a high degree of certainty. The counterfactual GVA pathways take into account both the GDP growth that might be expected in the absence of climate risks, and the average historical sector-specific GVA growth rates (for the period 2000–19). The counterfactual pathways are purely hypothetical and do not represent the Bank’s view of the long-run path for the economy. ↩

Some sectors experience very sharp shocks in the Early Action and Late Action scenarios. These include, for example, Mining and Manufacturing of cement (Table 4.F). These sectors’ supply chains produce over ten times more emissions than the economy average to produce an additional pound amount of value added. In the Late Action scenario, these sectors lose a majority of their UK GVA relative to the counterfactual path in which there are no additional headwinds from climate risks. However, some of the most affected sectors, like Electricity supply, recover most of their losses by the end of the scenario horizon. This is because after the initial shock, they quickly transition to low-carbon production. Other sectors, like UK Manufacturing of coke and refined petroleum products, are assumed to fail to transition and remain well below their counterfactual levels by the end of the scenario.

In the No Additional Action scenario, the range of sectoral impacts is much smaller than is the case in the other two scenarios. For example, the most affected sectors, Crop and animal production and Forestry and fishing, lose just over 40% of GVA by the end of the scenario, relative to the counterfactual pathways. This is largely due to greater direct and indirect crop damage due to increased erratic weather conditions and diseases, as well as reduced land and labour productivity. GVA in the Manufacturing of pharmaceuticals sector, which depends to some extent on agriculture and biodiversity, is around 30% below the counterfactual.

The sectors most impacted in the No Additional Action scenario are, however, much larger on average (in terms of their GVA share in the overall economy) than sectors most impacted in the other two scenarios. For example, by the end of the No Additional Action scenario, the Real estate sector, whose GVA share of the total economy is 14%, loses around 11% of its GVA relative to the counterfactual.

The sectoral variation in the No Additional Action scenario therefore represents a significant stress to the corporate sector. Moreover, sectoral deviations in the No Additional Action scenario continue to get worse even beyond the scenario horizon, as more and more physical risks manifest.

The relative impacts on different sectors outside the UK might differ. They will depend, in part, on the relative strength of transition and physical risks that apply in different regions. For example, the UK and the US may face similar transition risks but the US economy is more susceptible to extreme weather events, because of its geography. At the sectoral level, this would translate to larger shocks to sectors dependent on, for example, agriculture and biodiversity.

Glossary

BES – Biennial Exploratory Scenario.

CBES – Climate Biennial Exploratory Scenario (2021 Biennial Exploratory Scenario: Financial risks from climate change).

EME – emerging market economy.

EPC – Energy Performance Certificate

FPC – Financial Policy Committee.

GDP – Gross domestic product.

GVA – Gross Value Added.

IPCC – Intergovernmental Panel on Climate Change.

NGFS – Network for Greening the Financial System.

PRA – Prudential Regulation Authority.

PRC – Prudential Regulation Committee.

VIX – CBOE Volatility Index.

See our main Glossary for more key terms and abbreviations.