Several financial regulators, including the Autorité de contrôle prudentiel et de résolution (ACPR) and the Banque de France, have decided to subject French banks to climate stress tests from 2021. The aim is to assess their ability to withstand climate-related risks.
Climate stress tests based on rising carbon prices
Climate stress tests present a particular challenge: whereas conventional stress tests, also known as stress tests, are based on data collected during previous economic crises, climate stress tests are based on projections.
In order to be able to draw up scenarios despite the absence of precedent, the Banque de France and the ACPR have chosen to retain the only quantifiable element in the event of a crisis linked to climate change: the rise in the price of carbon.
3 scenarios have been imagined:
- in the first, the price of carbon increases progressively ;
- in the second, it increases more sharply and is associated with a fall in the price of oil;
- in the third and final scenario, the price of carbon skyrockets.
The Banque de France will be one of the first banks in the world to carry out this exercise, but others have preceded it, such as DNB (De Nederlandsche Bank) in the Netherlands, which will carry out its first climate stress tests in 2019. The Bank of England is also preparing for 2021.
Uncertainties and relevance sometimes called into question
These climatic stress tests, to which insurers will also be subject, are nevertheless the subject of criticism. For some, their relevance is limited bya large number of unknown factors, such as the intensity of the climate crisis in different geographical zones. In addition, some risk specialists feel that the scenarios are not sufficiently detailed, and oppose them with their own in-house scenarios.
However, as Banque de France Governor François Villeroy de Galhau stated in early November at the Journées de l'économie in Lyon, regulators need "a 'risk snapshot', i.e. the identification and publication of exposures, and a 'risk video' provided by forward-looking stress tests on carbon risk" to "better measure the long-term risks associated with climate change" and be able to carry out their mission of "ensuring financial stability".
In a note published at the end of October, the Autorité de contrôle prudentiel et de résolution (French supervisory authority) considers that "climate change is still only partially and heterogeneously integrated into the risk management process of financial institutions", blaming information that does not sufficiently detail physical risk and "does not yet enable the impact of energy transition scenarios on bank balance sheets to be quantified".
For its part, the European Banking Authority will make proposals by the end of the first half of 2021 on the inclusion of climate change risks in stress tests.