France's financial regulator is planning to evaluate the climate risk exposure of the country's financial institutions and will publish the results in April 2021.

Opening a public consultation on the evaluation due June 19, the Autorité de Contrôle Prudentiel et de Résolution, or ACPR, said May 25 that its "pilot exercise" was designed to alert banks and insurers to the financial implications of climate risk and encourage them to take a long-term view on climate change in their strategic decisions.

European banks have come under increasing pressure from supervisors and shareholders who are concerned that banks are financing industries that might become obsolete. For example, the ECB launched a consultation designed to help banks mitigate climate and environment risks on May 20. The Dutch central bank conducted its own climate stress tests in 2018, and the Bank of England also plans climate stress tests, although those have been delayed due to the coronavirus pandemic.

Voluntary tests

At the end of the consultation, the ACPR will set out the scenarios for the exercise, and lenders will have until the end of the year to submit the results, which will be made public in April 2021. Individual banks or insurers will not be named, and the tests are voluntary.

The exercise will test banks' and insurers' vulnerability to physical climate risks, which include rising oceans and extreme weather events. It will look at the frequency and cost of extreme weather events. It will also study the geographical exposure of French financial institutions, concentrating mainly on France, the rest of Europe and the U.S. because 75% to 80% of their exposure is in these regions.

It will also test the short- and long-term exposure of their balance sheets to climate change.

Banks will be expected to assess potential credit and market losses, while insurers will have to take into account health risks related to an increase of pandemics because of climate change.

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The exercise will not test financial institutions' solvency.

French banks at the vanguard

French banks such as BNP Paribas SA and Crédit Agricole SA are regarded as among the leading European lenders in tackling climate change. BNP Paribas recently topped a key ranking on climate change performance.

The country passed a law in 2015 designed to make the financial sector and publicly traded companies more accountable for sustainability. For example, it requires asset managers to report how they account for climate change when making investment decisions. Publicly traded companies must include climate change risks in their financial reporting.

The ACPR also published a set of best practices regarding climate change for banks on May 25. These include a clear strategy, climate change risk management and disclosure.