Saturday 24 October 2020

Dutch central bank introduces new stress test for climate change

Photo: Pbech via Wikimedia Commons

Financial institutions must increasingly factor in the consequences of a changing climate and the transition to a carbon-neutral economy, the Dutch central bank said on Thursday.

The bank now intends to make climate-related risks a bigger part of its regulatory role, with ‘the ultimate aim of ensuring sustainable financial stability’, the bank said in a statement.

A recent report by bank analysts on changes in the frequency of extreme weather and rising sea levels showed that the impact will be felt on the assets of financial institutions through various indirect channels.

In addition, the consequences of the Paris climate agreement to limit CO2 emissions will ‘create risks for the financial sector as a result of transition policy and technological developments’, the bank said. ‘The market for green finance is also emerging, with its own opportunities and threats.’

For example, Dutch insurers will have to deal with more claims as the result of climate-related damage. Climate change is also making it more difficult to estimate the likelihood of extreme weather which may, in turn, lead to risks being under-estimated.

As well as including climate-related risks in its role as regulator, the central bank said it is currently conducting a climate-related stress test at non-life insurers and working on a stress test for transition risks.

Read the report

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