ECB published a report that details the policy work done in 2020, the year in which the financial sector faced a major crisis in the form of COVID-19 pandemic. The report observes vulnerabilities in the non-banking financial intermediation sector as well as initial signs of a deterioration in asset quality of banks during 2020, which is expected to eventually translate into credit losses and non-performing loans. The report also notes that ECB is exploring all possible ways in which it could contribute to limiting risks from climate change within its mandate. The report highlights the work ahead and the main challenges that ECB will focus on over the coming years to address climate change risk.
Regarding financial stability, ECB is working with the Financial Stability Committee of the European System of Central Banks (ESCB), in close collaboration with ESRB, on state-of-the-art climate risk monitoring and assessment. The project team aims to develop a risk monitoring dashboard for financial intermediaries as well as to explore new modeling approaches to capture the long-term trade-offs of climate risks. ECB is also developing a top-down, economy-wide climate stress test, based on extremely granular information on firms’ vulnerability to climate risks and banks’ exposures. This exercise will inform the public debate on the materiality of transition and physical risks over a 30-year horizon based on forward-looking scenarios and will also lay the foundations for eventual macro-prudential policy measures in this field. ECB is also reflecting on how to address climate change considerations within the Eurosystem monetary policy implementation and risk management frameworks. This analysis hinges on improving the available information on the exposure of economic agents to climate change-related risks and opportunities. Therefore, ECB has been calling for more standardized and widespread disclosures of climate-related information.
In this context, the ECB, as a user of credit ratings, is also interested in understanding how climate change risks are incorporated into the respective rating processes. High-quality climate-related statistics and data are a necessary precondition to allow an informed analysis of climate change topics and the related risks relevant for central banking purposes. To address those needs, the ESCB Statistics Committee prepared a systematic overview of the existing data sources, user needs, methodological challenges, and data gaps that need to be filled. In an environment of evolving user needs, statistical work will first focus on developing a set of indicators, initially on an experimental basis, covering the amount of green financial instruments, the carbon footprint of financial institutions, and their exposures to climate-related physical risks. Work is also underway to investigate the macroeconomic risks stemming directly from climate change and from policies aiming at climate risk mitigation and adaptation. ECB is increasingly pursuing research projects in the field of climate change. A number of research papers have already been published in the ECB Working Paper Series and the research work in progress includes analyses of the risk exposures of large banks, the role banks play in fueling climate change, the pricing of green bonds, the effect of the EU Emissions Trading System on firms’ pollution, the climate change insurance gap, the impact of climate change on equity pricing, and the effect of carbon taxes on decarbonization.
ECB pursues a broad sustainable and responsible investment (SRI) policy based on selective exclusion and proxy voting guidelines that incorporate environmental, social, and governance standards. Going forward, ECB aims to explore the possible expansion of low-carbon indices to fixed- income asset classes. In its own funds portfolio, ECB applies a thematic SRI strategy that targets an increase of the share of green securities. This strategy is being progressively implemented by means of direct purchases of green bonds in secondary markets, to be complemented by exposures obtained through other investment vehicles. Looking ahead, ECB will set even more ambitious environmental targets, in line with the leading international efforts to fight climate change, while continuing the refinement of its methods to account for carbon emissions and the compensation of its residual carbon emissions jointly with a growing number of European institutions. Finally, from 2022, ECB plans to report in a holistic manner on its overall sustainability, thus going beyond its environmental performance.
Keywords: Europe, EU, Banking, Annual Report, COVID-19, Climate Change Risk, Credit Risk, ESG, Stress Testing, Disclosures, Sustainable Finance, Financial Stability, ECB
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