There is a need for conducting CO2 stress tests on financial institutions to further embed climate risks in supervision, the Dutch Minister of Finance said in a letter to the House of Representatives.

In the letter, Wopke Hoekstra, on behalf of the Minister of Economic Affairs and Climate Policy, Eric Wiebes, outlined the usefulness and necessity of CO2 stress tests.

He said stress tests play an important role in keeping a financially resilient system and emphasised the importance of transparency on climate impact and clear transition paths, as “the entire business community, including financial institutions, have a crucial role in facilitating the transition to a CO2-neutral energy supply”.

There are certain risks in the transition, he said. Physical risks such as flooding or drought, for example, can lead to substantial write-offs on investments if they are damaged.

In addition, financial institutions run risks through exposure to sectors, in which there is a contraction due to the transition to a CO2-neutral energy supply.

The Dutch central bank, DNB, published a stress test in October, calculating the consequences of the energy transition for the whole Dutch financial system for the first time. The bank is looking into how it can further embed climate risks in the supervision, which Hoekstra sees as a good first step in the development of stress tests on climate.

“The next step is setting reduction targets. There are conversations about this across the whole financial sector. I think that with this, a significant contribution can be made to the transition,” Hoekstra wrote.

The minister also stated that there are positive initiatives in Europe to get more clarity about the sustainability of investments, including Dutch finance task forces who are in talks about concrete plans and recommendations to facilitate or accelerate the intended transition.

In addition, institutions are working on methodologies to map the carbon footprint, via for example the Platform for Carbon Accounting Financials, Hoekstra said.

“In the cross-border nature of climate issues, I will commit myself to transparency, the insight into the climate impact of investment and the publication of these risks at European and international level. In addition, I will also refer to the good initiatives that are being developed in the Netherlands.”

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