DNB to introduce climate-related risks in its supervision

The Netherlands Bank (DNB) will introduce climate-related risks in its assessment of the Dutch financial system, the central bank says in a report published on October 5.

The Netherlands will face financial risks stemming from both climate change and the technological and economic changes required to transition to a carbon-neutral economy in the coming years. This will require financial institutions and policymakers to implement changes in their operating frameworks to prevent higher risk in the economy, the regulator says.

“We will continue to work on the implementation and further development of climate stress tests,” the central bank says. “We are currently conducting a climate-related stress test at non-life insurers and we are working on a stress test for transition risks, focused on the impact of an energy transition from a macroeconomic and macro-prudential perspective.”

The central bank points out financial institutions will increasingly be confronted with risks resulting from ongoing global warming and growing political will to achieve the goals of the Paris climate agreement.

One of the consequences will be the tightening of the sustainability requirements of office buildings, the regulator says. This could have the knock-on effect of putting the credit quality of related loans under pressure. The central bank also mentions insurers are already facing a growing claims burden as a result of extreme weather.

The exact impact and timing of natural disasters and complex industrial policies is uncertain. Thus, the central bank recommends that financial institutions work towards applying forward-looking risk management, for example with the help of scenario analysis. Banks should, therefore, be aware of the types of real estate in their portfolios, and their exposures to carbon-intensive sectors.

Insurers should also fine-tune their risk models and management to better cope with the increasing liabilities produced by events linked to climate change.

The central bank recommends policymakers delineate a clear transition path towards a cleaner economic model. “This will allow the economy and thereby also financial institutions to take appropriate action and make adjustments at an early stage,” it says.

Financial and non-financial firms should be encouraged to be more transparent about climate-related risks so that the financial system has the information required to adequately identify and price risks.