Climate Stress Tests to Be Mainstream for Banks, Insurers.
Banks and insurers around the world are likely to face climate-related stress tests in the next two to three years as supervisors become increasingly aware of the urgency in gauging the risks from climate change, Fitch Ratings says in a new report.
Regulatory stress testing is expanding fast, led by supervisors in jurisdictions with a clear focus on environmental policies, such as the EU and the UK. The tests announced will not test capital adequacy but may lead companies to look more closely at whether they need to hold more capital to cover potential losses from climate-change risks. In the longer term, we expect climate stress tests to feed into prudential capital requirements. More banks and insurers are likely to start shifting their balance sheets away from some of the sectors most exposed to climate-change risks, such as manufacturing, electricity, construction, transport and real estate.
Several major jurisdictions have already announced climate-related stress tests and several others are considering them. Most supervisors are drawing on scenarios published by the Network for Greening the Financial System, which are backed by scientific research.
French financial institutions will be the first to announce results in April 2021, before the UK launches its biennial stress testing in June 2021. The European Central Bank will test significant eurozone banks in 2022. Authorities in Australia, Brazil, Canada, Hong Kong and Singapore have announced tests for 2021 and 2022.
We expect climate considerations to become more high-profile for US financial institutions as climate change is a priority for the US government under the Biden administration. Formal climate stress testing of financial institutions in China and Japan has not been announced, but we believe it is coming soon.
Click here for the full report "Climate Change Stress Tests Are Becoming Mainstream". For more commentary from Fitch, please visit our ESG insights page.
8 April 2021
Climate Action
