Climate-related risk and financial stability

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.