Finance institutions’ climate stress testing will grow

Significance

Although there is agreement on baseline scenarios, modelling presents a huge challenge due to the unprecedentedly lengthy timescales, and there is a risk of significant divergence by country.

Impacts

• Banks and insurers will manage their exposures to polluting versus carbon-friendly sectors; this could hasten national energy transitions.
• US policies will be key, given US President Joe Biden’s focus on international action to combat climate change.
• As financial institutions become more aware of the climate implications of their decisions, they will adopt more sustainable strategies.
• As confidence in climate change-related stress-testing improves, it will be incorporated into broader prudential capital requirements.