13 May 2021

FBF: The driving force of the Paris financial centre and progress made in the fight against climate change have been underscored by the resu

The results speak volumes: the Paris financial centre plays a key role in the climate transition, and concrete progress has been made in combating climate change since the Paris Agreement was signed in 2015.

The ACPR (French Prudential Supervisory and Resolution Authority) conducted a pilot climate study in order to assess the resilience of French economic operators, especially banks, to raise the awareness of financial institutions of the importance of incorporating climate change risks, and to identify areas for improvement in terms of data and resources.

The ambitious stress testing exercise Stress tests are exercises aimed at checking an entity's resilience to a set of risks associated with a given issue. They are transparent exercises and the scenarios are made public, as are the methodology and results. offered by the ACPR covered an unusually long time frame for a stress test (30 years), covered more than 50 economic sectors, and was based on innovative assumptions such as dynamic assessments. The participating banks worked hard to ensure that the results were representative.

According to these results, French banks are resilient in the variety of scenarios considered in the pilot study, with exposure to climate change risks deemed "moderate." This is because French banks are deeply committed to supporting a responsible yet concrete climate transition, as confirmed by the ACPR, which stated that "The exposure of French banks to sectors that are the most impacted by transition risk, as identified in this exercise (extractive industries, manufacture of coke and refined petroleum products, oil, agriculture, etc.), is relatively low."

Potential areas for improvement were also clearly identified, with the twofold aim of avoiding an uncontrolled increase in cost of risk and a delay in the climate transition. For this reason, banks are incorporating increasingly detailed risks generated by climate change in their assessment of financial risks.

Furthermore, from now through 2050, banks will support the transformation of their corporate clients engaged in a climate transition plan, and will thus have a significantly different CO2 emissions profile and credit risk profile than those described in the ACPR scenarios.

Overall, the simulation served as a basis for establishing research that will help a growing number of supervisors around the world develop a common foundation of climate risk knowledge and assessment. The results of this unprecedented stress test should be viewed as a basis for a global approach through which the transition can be successfully completed.

¹ Stress tests are exercises aimed at checking an entity's resilience to a set of risks associated with a given issue. They are transparent exercises and the scenarios are made public, as are the methodology and results.

FBF

© FBF - French Banking Federation