ACPR launched the "climate pilot exercise," which aims to make French banking and insurance establishments aware of the risks associated with climate change. This exercise, by the French Prudential Supervision and Resolution Authority ACPR, is intended to measure the physical and transitional risks to which the institutions are exposed by 2050. The exercise has a methodological dimension, as it seeks to identify the difficulties encountered in conducting this type of exercise. The deadline for submission of results is the end of 2020. BDF, which is the central bank of France, also published a working paper that presents the analytical framework developed for this pilot exercise and to be used to generate variables and transition scenarios.
The BDF working paper proposes an analytical framework to quantify the impact of climate policy and the transition narratives on economic and financial variables necessary for financial risk assessment. Focusing on transition risks, the scenarios considered include unexpected increases in carbon prices and productivity shocks to reflect disorderly transition processes. The modeling framework relies on a suite of models, calibrated on the high-level reference scenarios of the Network for Greening the Financial System (NGFS). The results show the materiality of the negative economic impact of disorderly transitions toward a low-carbon economy. Although the effects at the macroeconomic and the financial market levels remain somewhat limited, impact on the sectors exposed to simulated transition policies are substantial. The sectoral heterogeneity is also found at an infra-sectoral level, with companies within sectors affected differently by the transition. The magnitude of such sectoral and infra-sectoral impact gives rise to financial stability risks that are potentially much more pronounced than the macroeconomic and the financial market levels would have suggested. The modular approach adopted in this paper provides a flexible and efficient architecture, "compartmenting" the numerous modeling challenges.
Relying on this approach, ACPR has selected a number of quantitative scenarios to be submitted to a group of voluntary banks and insurance companies to conduct the first bottom-up pilot climate-related risk assessment. The documents, published by ACPR, related to the climate pilot exercise include the following:
- The main document that presents scenarios and key assumptions used for this exercise. This document is an update of the provisional assumptions of the climate pilot exercise, posted on May 25, and was subject to public consultation until June 19, 2020. It takes into account the macroeconomic projections of the Eurosystem, which were published on June 04, 2020, provide a first measure of the impact of the health crisis, and affect the start of the pilot exercise. It also takes into account the transition scenarios that were published on June 24, 2020 by the NGFS, along with a review of certain technical parameters and assumptions.
- Two guides—one for banks and the other for insurance organizations—specifying the technical details of the exercise.
- The Excel files with each transition scenario (reference, accelerated, and delayed).
- The tables (templates) that banking groups and insurance organizations will have to submit to ACPR.
- A correspondence table with NACE codes.
Keywords: Europe, France, Banking, Insurance, Climate Change Risk, ESG, NGFS, ACPR, BDF
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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