Source: asiainsurancereview.com

Banks and insurers around the world are likely to face climate-related stress tests in the next two to three years as supervisors become increasingly aware of the urgency in gauging the risks from climate change, Fitch Ratings says in a new report.

Regulatory stress testing is expanding fast, led by supervisors in jurisdictions with a clear focus on environmental policies, such as the EU and the UK, Fitch notes. Authorities in Australia, Brazil, Canada, Hong Kong and Singapore have announced tests for 2021 and 2022. For instance, the Australian Prudential Regulation Authority (APRA) announced in February last year that it was looking to better understand the financial risks of climate change and would begin undertaking tests of the industry’s vulnerabilities. The watchdog will also develop industry guidance that will help provide better clarity on regulatory expectations in relation to climate-related financial risks.

Fitch says that the tests announced will not test capital adequacy but may lead companies to look more closely at whether they need to hold more capital to cover potential losses from climate-change risks.

In the longer term, Fitch expects climate stress tests to feed into prudential capital requirements. More banks and insurers are likely to start shifting their balance sheets away from some of the sectors most exposed to climate-change risks, such as manufacturing, electricity, construction, transport and real estate.

Several major jurisdictions have already announced climate-related stress tests and several others are considering them. Most supervisors are drawing on scenarios published by the Network for Greening the Financial System.