French banks and insurers should step up their transition towards a net zero carbon world, regulators said Tuesday as they released what they called the first climate stress tests for financial institutions.
The ACPR prudential management supervisor and the Banque de France said the review of nine banking and 15 insurance groups found they only faced moderate financial risks from climate change.
Nevertheless, the regulators said banks and insurers “should deepen from today their actions to combat climate change by incorporating the financial risks it poses, as these are actions which will contribute to evolutions observable in the medium and long term”, their report said.
“Better taking into account climate change risks is in fact necessary to encourage a better allocation of resources and finance the transition,” it added.
The test examined three scenarios for reaching net zero carbon emissions in 2050, which is what experts consider necessary to limit the rise in global temperatures to 2 degrees Celsius by the end of the century — as agreed in the 2015 Paris Accord.
The scenarios varied the speed by which banks and insurers adjusted their portfolios out of polluting industries.
These sectors would have the highest risk costs and greater chances of defaults, the report found. It calculated a tripling of risk costs — higher than the doubling of risk costs experienced by financial institutions during the Covid-19 pandemic.
A fourth scenario, in which carbon neutrality was not met by mid-century and a surge in global temperatures occurred, was accompanied by huge weather-related losses.
Even on a trajectory towards carbon neutrality the report found that the cost of weather-related damages could be multiplied by a factor of five or six by 2050 in some French regions.
Insurance premiums would need to double or even triple to cover the losses, the report found.
While the regulators noted the limited predictive nature of such exercises, they said they were useful in raising the awareness of the managers of financial institutions to risks connected to climate change.