What will happen to your business if temperatures rise by 4C by 2080? If you are a banker or insurer in the U.K you have until 2021 to figure out the answer. The Bank of England has become the first central bank in the world to test how financial institutions would cope with more severe weather conditions like floods and temperature rises amongst others. 

HSBC, Barclays and Others 

HSBC and Barclays will be amongst the banks who will have to demonstrate their preparedness to deal with climate change as part of the regular annual stress tests for 2021. Insurers have already had to participate in confidential climate related tests, the results of which will be published in the first quarter of 2020. 

Everyone Gets A Pass 

In the beginning, the results of the test will not be binary - instead of a pass or a fail results will be published in aggregate and not name individual institutions. In future, the central bank does not rule out naming and shaming individual offenders. In the U.K, loan exposure to fossil fuels and other environmental assets account for as much as 70 per cent of tier one capital which is the bedrock of it's funding. 

Welcome Move But What About Cryptocurrencies? 

Industry associations such as UK Finance and Association of British Insurers have welcomed the move, and off-the-record reactions from individual banks have been positive as well. If found lacking, banks may have to adhere to more stringent capital norms. Ironically the stress tests will not impact cryptocurrencies which are large consumers of energy and hence carbon emissions.