(13 July 2022 – Europe) A European Central Bank (ECB) climate risk stress test of 104 banks revealed the majority lack a defined climate risk stress-testing framework and do not include climate risk in their credit risk models, posing a direct risk to European Union (EU) financial stability.
60 percent were found not to have a climate risk stress-testing framework and only one in five consider climate risk as a variable when granting loans according to the climate risk stress test conducted by the ECB. Up to two thirds of non-financial corporate customer income is attributed to excessively carbon emitting industries.
The ECB stress test indicated that’ “financed emissions” are chiefly derived from a concentrated number of large corporates, raising their exposure to transition risks.
“The stress test is an important learning exercise for the banking sector. More should be done to incorporate climate risk into the stress-testing frameworks and internal models. Banks can only play a major role in Europe’s green transformation if supported by governments’ industrial and climate policies” said European Banking Federation CEO Wim Mijs.