ADEME publishes its first study on climate-related stress-tests
ADEME has just published a technical report on the realization of macroeconomic scenarios of climate-related stress tests. This report presents a review of the art on the realization of climate stress tests by central banks, supervisors and international institutions and on the macroeconomic modeling of the climate scenarios they require.
Stress tests are commonly used by financial institutions to measure their resilience to the materialization of short-term economic and financial risk. They need structural adaptations to be extended to climate risks, whether they are :
- physical risks: direct effects of chronic or extreme weather events
- transition: economic consequences inherent in the process of achieving carbon neutrality
- liability: legal actions against institutions that would be held responsible for the consequences of climate change.
Climate scenarios are subject to specific challenges: potentially very long time horizons, advanced granularity of the scenarios to take into account the numerous international and sectoral specificities, radical uncertainty and extreme amplitude of risks, interdependence of physical and transition risks.
Several central banks and supervisors have carried out initial exercises, still with an exploratory objective, to assess the climate resilience of financial institutions: the Bank of the Netherlands (2018), the Bank of England (2019), the Bank of Canada (2020) and the Bank of France (2020). The construction of climate scenarios by supervisors is based on a large number of choices and hypotheses, for which ADEME’s expertise can bring a new perspective through its experience in national prospective scenarios (energy-climate laws, Multiannual Energy Programme, National Low-Carbon Strategy, ADEME Energy Transition Scenarios). As such, the properties of the Three-ME model, co-developed by ADEME and OFCE and used by the Ministry for the Ecological Transition, allows to get an overview of the expected sectoral effects in a climate scenario and to assess the needs of supervisors for such exercises.
Given the steps that need to be taken to build climate resilience tests and in presence of different existing hypotheses and methodological choices, the work carried out by ADEME aims to make proposals and recommendations based on the macroeconomic, prospective and sectoral expertise of the agency. This note is the first step in this process.