The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) have released a report titled "Towards macroprudential frameworks for managing climate risk." The document delves into the potential risks that climate change poses to the financial system of the European Union (EU), and proposes a macroprudential strategy aimed at mitigating these impacts on the sector.
According to a press release issued by the ECB, banks play a crucial role in addressing risks arising from emissions within the EU economy that pose threats to financial stability. The report reveals that banks often lend to sectors with substantial exposure to climate risks, which are disproportionately represented in bank loans. This is particularly evident in mortgage lending, where 60-80% of all loans in the EU are granted to high-emitting households.
The ECB press release further outlines additional potential risks to the financial system. For instance, it states that 75% of bank loans and over 30% of insurer investments in corporate bonds and equity are tied up in economic sectors heavily reliant on ecosystem services. These include services associated with surface and ground water, mass stabilization and erosion control, as well as flood and storm protection.
In its effort to address climate risk to the financial system, the report proposed by ECB suggests several frameworks. These include gathering evidence on key financial stability indicators through a surveillance framework and corresponding Chartbook. The term 'Chartbook' refers to "Chartbook for monitoring financial stability impacts of climate," published by both ECB and ESRB in December 2023. This Chartbook provides indicators for regular monitoring of climate-related risks to financial stability. The gathered evidence can subsequently be utilized for devising a macroprudential strategy—a comprehensive risk management approach encompassing banks, their borrowers, as well as non-bank financial intermediation.
As per the joint press release by ECB and ESRB, this comprehensive 156-page report is one among four climate risk reports published by these institutions.