Extreme weather risks: €196 billion losses for French finance
A Banque de France blog post estimates French financial institutions face €196 billion in losses from extreme weather events. This is equivalent to a 4 percent drop in equity and bond portfolios, based on NGFS short-term climate scenarios.
Physical risks outweigh transition shocks
The analysis, building on the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) "Disasters and Policy Stagnation" scenario, quantifies the impact of a series of natural disasters.
This scenario simulates extreme but plausible regional weather events, including droughts, heatwaves, and wildfires in 2026, followed by floods and storms in 2027.
Under this physical risk scenario, the average potential share price correction is estimated at 14.5 percent, significantly higher than the 2.7 percent decline simulated under a sudden climate transition scenario.
Corporate and sovereign bonds would also fall by 4.2 percent and 3.2 percent, respectively, under physical risk, compared to 1.0 percent and 0.6 percent under transition risk.
The study highlights that physical risk generates more significant and widespread losses on average.
Agriculture, construction, and investment funds exposed
Sectoral analysis reveals varied exposures: "dry events" in 2026 would primarily affect agriculture (a 41 percent drop in share prices) and construction (an 18 percent decline).
Conversely, "wet events" in 2027 would have a broader negative impact across all economic sectors, with an average 15 percent downward correction in share prices due to damage to physical assets.
For French financial institutions, total losses are estimated at €196 billion, representing a 4 percent drop in the value of their equity and bond portfolios.
Investment funds appear most vulnerable, facing average losses of 5.1 percent (€62 billion), driven by their significant equity market exposure.
Insurance undertakings would see a 3.8 percent loss, while credit institutions, concentrated in bonds, would be relatively less affected.
A wake-up call, but not a catastrophe
This Banque de France analysis provides concrete, quantified figures for a critical, often abstract, risk.
While the aggregate impact for French financial institutions appears contained, the specific vulnerabilities of certain sectors and investor types demand urgent attention.
Financial institutions must integrate these quantified risks into their strategies beyond mere compliance to ensure long-term resilience.