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OPINION

Climate stress tests may be flawed, but they are also a force for good

Stress tests mean that banks must assess their own climate impact. The glaring data gaps will close as the science progresses and methodologies evolve.

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Photo: iStock

Nothing distils a highly complicated problem quite like a spreadsheet. This late 1970s computer creation has brought us the analysis of data using clearly defined metrics and mathematical formulae that offer the certainty of finding a right or wrong answer.

This has been music to the banking industry’s ears. But when central banks demand spreadsheets detailing the immense and largely speculative impact of both physical and transitional climate shocks on bank balance sheets, the enthusiasm starts to wane. The data is partial, the metrics are debatable, and there is certainly no right or wrong answer.

The European Central Bank is collecting data from large European banks within its remit for the 2022 supervisory climate-risk stress test. Last month, the Bank of England published the results of its own climate stress test, with participation from banks representing around 70% of lending to UK households and businesses.

The Banque de France, which co-launched its pilot climate stress test back in 2020 with the Autorité de Contrôle Prudentiel et de Résolution (ACPR) as a blueprint for regulators around the world to copy, is due to start its second iteration of the test in 2023.

It