Taking the Carbon Out of Credit

Central banks must review the way they conduct stress tests for banks, including attending to the systemic and long-term consequences of climate change, according to this paper from the Climate Safe Lending Network.

The report notes that the Bank of England has taken the lead by extending its time horizon for stress tests to 30 years, while the ECB has laid out plans for a stress test that considers macroeconomic factors such as de-leveraging the banking sector.

The focus of the paper is to lay out how banks can become ‘climate safe’ and align their lending with the transition to a net-zero economy, for example by broadening risk management to encompass systemic as well as financial risks.