Report looks at key risks climate change poses to financial stability – and what the EU is doing about them.
Climate change is one of the most pressing issues of our time, and its impact on the financial system is a growing concern. A report by the European Commission published on 1 July sheds light on the risks that climate change might pose to financial stability in the European Union and takes stock of ongoing EU policy initiatives.
The report compiles data which shows that climate risks could lead to losses for financial and non-financial companies. It covers impacts on various parts of the financial system, including banks, insurers and investment funds. For example, based on 2023 stress tests from the European Central Bank, the median EU bank faces losses of 0.6 to 1% of its total portfolio over a modelling horizon of 8 years, though the estimates in the report should be seen as a lower bound of the actual impact.
The report is part of an ongoing learning process by regulators, supervisors and industry.
Why is climate change a financial issue?
Climate change is not just an environmental problem; it can have significant implications for the economy as a whole – including the financial system. Rising temperatures, more frequent natural disasters, and changing weather patterns can all have a major impact on businesses, economies, and financial markets. For example, a company that relies on fossil fuels may see its profits decline as governments implement policies to reduce carbon emissions. Similarly, a bank that lends to companies in areas prone to natural disasters may face significant losses if those disasters occur.
What are the key risks?
The report takes stock of existing research identifying two main types of climate-related risks: transition risks and physical risks. Transition risks arise from the process of transitioning to a low-carbon economy, such as changes in policy, technology, and market sentiment. Physical risks, on the other hand, result from the physical impacts of climate change, such as more frequent natural disasters and rising sea levels....
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