Legal & Regulatory News

ECB and ESRB joint report on climate-related risk and financial stability

On 1 July 2021 the European Central Bank (ECB) and European Systemic Risk Board (ESRB) released a joint report publication on climate-related risk and financial stability. The report analyses an expanded set of climate change drivers over long-dated financial risk horizons, aiming to provide a more encompassing and robust quantification of financial stability risks in the EU to underpin targeted and effective policy action.

The report is accompanied by a data supplement focusing on data and measurement issues in physical and transition risk analysis and provides a specific methodological application for each type of risk. Three climate scenarios from the Network for Greening the Financial System (NGFS) are explored, and the following forms of risk concentration are identified:

• exposures to physical climate hazards are concentrated at the regional level;
• exposures to emission-intensive firms are concentrated across and within economic sectors; and
• exposures to climate risk drivers are concentrated in specific European financial intermediaries.

The report highlights that credit and market risk losses for EU banks, issuers and investment funds may arise from an insufficiently timely or effective climate transition, and that the risks to the financial system still need to be better understood.

Click here to access the full joint report.