This report discusses the impacts of climate change on financial stability hinge on both the distribution of financial exposures and the evolution of prospective financial system losses.
A granular mapping of financial exposures to climate change drivers suggests uneven vulnerability across EU regions, sectors and financial institutions.
- Exposures to physical climate hazards are concentrated at the regional level, with potential stranding risks.
- Exposures to emissions-intensive firms are concentrated not only across but also within economic sectors, leaving parts of the financial system vulnerable to potentially destabilising financial market corrections.
- Exposures to climate risk drivers are also concentrated in specific European financial intermediaries.
Long-term scenario analysis for EU banks, insurers and investment funds suggests credit or market risk losses from an insufficiently timely or effective climate transition.
- EU banking sector credit risk losses under adverse climate scenarios could amount to 1.60-1.75% of corporate risk-weighted assets in a 30-year timeframe.
- EU insurance sector market risk revaluation losses could be material in key climate-sensitive sectors for corporate equity and, to a lesser extent, corporate bond investments over the next 15 years under a disorderly transition scenario.
- Market risk losses could also be relevant for EU investment funds. Adverse scenarios suggest a direct aggregate asset write-down of 1.2% in holdings of equity and corporate bonds in the next 15 years,
Notwithstanding notable progress in measuring and modelling climate related risk, much still remains to be done.