Climate risk is worth stressing about
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Climate risk is worth stressing about

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Central banks have been tweaking and improving their stress testing models in recent years. But these schemes are already long overdue using a climate risk scenario.

The Bank of England is helping to lead the way, running an innovative scenario in 2017 looking at how large financial institutions measure up against a range of risks, including competition from challenger banks.

But climate scenarios are yet to make their way into mainstream, public stress testing.

This is despite the fact that these scenarios already exist, usually shaped around the goal of keeping the global average temperature increase to 2°C above the pre-industrial average.

Citigroup, Westpac and Industrial Commercial Bank of China have all conducted some kind of environmental and climate scenario analysis, for example.

And a pilot project involving 16 prominent global banks is working on developing a set of climate scenarios based on the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD).

A central bank should be brave enough to take this work to the next level, incorporating a 2°C scenario in a system-wide stress test.

There is no greater uncertainty for the global financial system than the risk posed by climate change.

And the true virtue of annual stress testing lies in its capacity to aid in knowledge sharing, which is sorely needed to tackle such a big threat to not just finance but life as we know it.

Boston Common Asset Management published a report on its third climate management survey this week, concluding that banks are simply not doing enough to capture the risks and opportunities of climate change.

It is high time the supervisors gave them another push.

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