Climate change: According to the ECB, banks must prepare better for the consequences

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Banking district in Frankfurt am Main: Calculate losses as a result of extreme weather events

Photo: Frank Rumpenhorst / dpa

Financial institutions in the euro area have to prepare much more for the financial and economic effects of climate change.

This is the result of a climate stress test by the European Central Bank (ECB), the results of which were published on Friday.

"Banks in the euro area urgently need to step up their efforts to measure and manage climate risk, fill the current data gaps and adopt good practices already in place in the industry," said ECB Chief Banking Supervisor Andrea Enria.

A total of 104 banks took part in the climate stress test, the ECB's first to date.

41 institutes were tested in special negative scenarios.

According to the results, around 60 percent of the institutes do not yet have a climate stress test framework.

In addition, most institutes have not yet included climate risks in their credit risk models – only 20 percent of financial institutions consider climate risks as a factor when granting loans.

The stress test also found that in business with corporate customers, almost two-thirds of the income comes from CO2-intensive sectors.

In a third part of the stress check, banks had to calculate losses resulting from extreme weather events such as heat waves and floods and under various transition scenarios.

At the 41 banks that took part, the credit and market losses added up to a total of 70 billion euros.

“We expect banks to act decisively and develop robust climate stress testing frameworks in the short to medium term,” said ECB Director Frank Elderson.

On the one hand, the test aimed at the physical risks resulting from climate change, such as floods and heat waves.

In addition, there are risks for the institutes associated with the conversion process towards a lower-CO2 and greener economy.

According to the specifications of the ECB, the stress test has no direct impact on the capital of the banks.

mike/Reuters