ACPR published the results of its "climate pilot exercise," which assesses the financial risks associated with climate change within the banking and insurance undertakings. The exercise was conducted from July 2020 to April 2021. The pilot exercise revealed an overall "moderate" exposure of French banks and insurers to climate risks. However, this conclusion must be put into perspective in view of the uncertainties concerning both the speed and the impact of climate change. Consideration is also required with respect to the assumptions made, the scenarios analyzed, and the methodological difficulties raised by the exercise.
The pilot exercise indicated that, based on the current balance sheet structures, considerable efforts must be made to help significantly reduce greenhouse gas emissions by 2050 and to contain the rise in temperature by the end of the century. The exposure of French institutions to the sectors most impacted by transition risk, as identified in this exercise (such as mining, refining, oil, agriculture, and construction), is relatively low. In addition, institutions tend to reduce their exposures to these sectors by 2050. However, these sectors post the highest increase in the cost of risk and probabilities of default. The pilot exercise also shows that the vulnerabilities associated with physical risk are far from negligible. Thus, on the basis of the information provided by insurers, the cost of claims could rise by a factor of 5 to 6 in certain French departments between 2020 and 2050.
Banks and insurers must, therefore, step up their efforts to combat climate change by integrating climate risks into their financial risk assessment process, as these efforts will contribute to the changes that will be observed in the medium and long-term. Taking better account of climate risks is indeed necessary to promote a better allocation of resources and ensure the financing of the transition. While banks and insurers seem to be generally aware of this issue, their degree of maturity remains heterogeneous and some institutions have not necessarily yet integrated the proper degree of urgency to act. This exercise also reveals a number of methodological limitations on which progress needs to be made. The following are the key improvement areas identified by ACPR:
- Assumptions used to design the scenarios and identify sensitive sectors
- "Physical risk" is a notable improvement area for which collective work is also needed because it implies taking into account interdependencies and a sound knowledge of the value chains, which remains largely insufficient
- Improvement of the models used by banks and insurers
This is the first climate exercise conducted by a supervisor based on a bottom-up approach—that is, using assessments made individually by banks and insurers based on common macroeconomic assumptions defined by ACPR. Its unprecedented nature also lies in the time horizon of the assessed risks (30 years, from 2020 to 2050, as opposed to 3 to 5 years for traditional financial stress-tests, the methodologies used, and the inclusion of both the physical and transition risks associated with climate change. To assess the financial risks associated with climate change, ACPR drew on the recommendations published by the network of central banks and supervisors for the greening of the financial system (NGFS) and used two of its transition scenarios published last June. The work of ACPR is based on an analytical framework developed specifically for this exercise, jointly with Banque de France staff. As a follow-up to this exercise, new working groups will be organized with banks and insurers and this assessment exercise will be renewed regularly. The next exercise is expected to take place in 2023 or 2024.
Keywords: Europe, France, Banking, Insurance, Climate Change Risk, ESG, Stress Testing, Scenario Analysis, NGFS, BDF, ACPR
A well-recognized researcher in the field; offers many years of experience in the real estate ﬁnance industry, and leads research efforts in expanding credit risk analytics to commercial real estate.
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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