The Bank of England’s climate stress test shows which risks the financial sector would take even without climate protection measures.
(Photo: dpa)
Frankfurt The Bank of England (BoE) expects climate risks in the billions for banks and insurance companies from climate change. Depending on how quickly and decisively climate change is combated, the environmental losses of the industry are likely to be between 209 billion British pounds and – if nothing is done to protect the climate – 334 billion British pounds (equivalent to 393 billion euros).
This emerges from the final report of the climate stress test, which the British central bank published on Tuesday. “Climate change risks are becoming a permanent stumbling block to bank and insurer profitability, especially if they don’t manage them effectively,” said Sam Woods, the Fed’s lieutenant governor responsible for overseeing the industry.
According to the stress test, climate risks could lead to losses of 10 to 15 percent of the industry’s average annual profits. “Losses of this magnitude could make individual companies and the financial system as a whole more vulnerable to other future shocks,” writes the Bank of England.
However, the authority does not see an immediate threat to the financial system. The overall cost of transitioning to a zero-carbon economy appears “sustainable” with no “substantial impact” on companies’ equity positions, writes the BoE.
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The Bank of England is the first major central bank to conduct such a comprehensive climate stress test. The European Central Bank (ECB) is currently conducting a stress test among major banks. The results should be available in July. “In the course of 2024” there should also be a joint climate and environmental stress test for banks, insurance companies and investment firms in the European Union, as Jakob Gyntelberg, Director of the EU banking supervisory authority Eba, recently told the Handelsblatt.
Similar simulation in France
The rating agency Fitch described the British climate stress test as “tougher” in relation to a comparable climate exercise by the French central bank last year. In comparison, the scenarios contain a higher price increase for CO2 certificates and a stronger rise in temperature. The study period extended over 30 years.
Climate change would have the greatest financial impact on life insurers, whose risk of loss is £112bn in the best case – i.e. decisive climate action – and £218bn in the worst case – nothing happens here. That’s because life insurers invest their policyholders’ money heavily in company securities.
With strict climate protection measures, the securities of companies that consume a lot of CO2 would lose. If climate protection were not done, investments in companies from sectors that would suffer from severe climate change, such as food producers, would be at risk.
For banks, a late response to climate change would be the most costly (£110bn). It would seem cheapest (£60bn) if no action were taken.
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However, the Bank of England warns against concluding from the data that climate protection is not worthwhile for banks. “These estimates are particularly uncertain,” the central bank said. She feels that banks are “less well equipped to fully assess the impact of the physical risks” that are prevalent in a “no action” scenario. This applies above all to the consequences that a dramatic climate scenario could have for companies.
The conversion also reveals opportunities
The stress test also examined the industry’s possible responses to climate change. A climate-neutral restructuring of the economy would then offer more opportunities for the financial sector for additional business than doing without climate protection.
“Banks were able to quantify more new opportunities than life insurers,” says the report. That’s because banks are lending more to beneficiaries of such a transformation, such as green energy companies or companies that make technology for batteries for electric vehicles. Firms dependent on fossil fuels would receive less credit.
The increasing probability of extreme weather events could pose a threat to British policyholders. Property insurers would then raise the prices for insurance with increasing risks. Since most policies are limited to one year, insurers can adjust prices quickly. In a scenario without climate protection, around seven percent of British households would lose their insurance cover because their properties would then be considered uninsurable or the policy would be too expensive.
More: ECB supervision is putting pressure on banks to become “greener”.