Climate stress test results: ECB wants to guide banks through the green transition
The ECB published the long-awaited results of this year's climate stress test on Friday, July 08. In this stress test, financial institutions were assessed for their resilience to climate change in the first quarter of 2022. CURENTIS summarizes the key findings for you in a first article.
In the following weeks, we will analyze the results in detail and explain them to you in detail in a series of articles.
The ECB Climate Stress Test is an important component of the ECB's overall climate roadmap. In terms of content, the stress test was divided into three different modules:
- a qualitative questionnaire
- Comprehensive data provision with regard to carbon-intensive sectors of the economy, and
- the heart, the scenario analysis.
Furthermore, best practice approaches were to be collected and analyzed. The focus was more on gaining knowledge and not on evaluating and regulating the capitalization of the various institutions. (More information on the climate stress test can be found here (link: https://www.bankingsupervision.europa.eu/press/pr/date/2022/html/ssm.pr220708~565c38d18a.en.html). The stress test covered a total of 104 credit institutions, with the bottom-up stress test in the third module focusing on 41 directly supervised banks for reasons of proportionality.
The core findings are unsurprising and confirm the general prevailing view on sustainability in banks. While banks have been able to present new and comprehensive information related to climate change and the associated risks, a resilient framework is still lacking. The majority of banks are not sufficiently robustly positioned and also the data, despite improvement, is still insufficient for detailed consideration. It was also confirmed that financial institutions face lower losses in an orderly transition to a low-carbon economy than in a disorderly transition, where policies are introduced and implemented late.
In the event of a disorderly transition, financial losses as a result of physical risks (climate catastrophes) were calculated on the basis of the scenario analysis in the amount of €70 billion for the 41 financial institutions. However, this is only a small part of the actual losses, as many aspects were only considered in part or not at all: Due to the early stage, only very few data were available, the banks' forecasts only included climate risks in a rudimentary way, economic downturns and second-round effects were not taken into account, and the risk positions covered represent only about 1/3 of all risk positions. Thus, it can be assumed that losses will be many times higher in reality.
As next steps, the ECB now expects to strengthen the measurement and management of climate risks, as well as to close data gaps and apply recognized procedures and best practices that emerged from the climate stress test. Frank Elderson, Vice Chairman of the Oversight Board, sees this exercise as a critical milestone in strengthening the resilience of the financial system to climate risks and also expects consistent measures to be implemented. He also expects the establishment of a robust framework for climate-related stress testing in the short to medium term.
In summary, the ECB is determined to guide banks through the green transition and is committed to intra- and extra-European cooperation. The lessons learned will feed into wider supervisory activities, such as the "Thematic review on climaterelated and environmental risks, 2022". This is a thematic review of the integration of climate and environmental risks into a company's own governance, strategy development and risk management (link: https://www.bankingsupervision.europa.eu/press/speeches/date/2022/html/ssm.sp220218_annex~1f075839e6.en.pdf?9ed894f94f59a338cb8994d2c587abdf).
About the author: Philipp Ehren has been a senior consultant at CURENTIS AG since 2021. He has several years of experience from project work in risk management with a focus on IT applications. In addition, he has specialized in Sustainable/Green Finance.