EBA published results of the first pilot exercise on climate risk in EU. The exercised is aimed to map bank exposures to climate risk and provide an insight into the to-date green estimation efforts of bank. The results show a clear picture of the data gaps at banks and highlight the sense of urgency to remedy these gaps if banks are expected to achieve a meaningful and smooth transition to a low-carbon economy. It is only through a more harmonized approach and common metrics that the efforts of banks will prove meaningful in addressing and mitigating the potentially disruptive impacts of environmental risks. The findings also show big differences in the application of the EU taxonomy by banks.
The results of the pilot exercise show that more disclosure on transition strategies and greenhouse gas emissions would be needed to allow banks and supervisors to assess climate risk more accurately. The results also highlight the importance for banks to expand their data infrastructure to include client information at the activity level. More than half of the bank exposures to non-small and medium enterprise corporates (58% of total) are allocated to sectors that might be sensitive to transition risk. A parallel analysis, based on greenhouse gas emissions, reveals that 35% of total submitted exposures of banks are toward EU obligors, with greenhouse gas emissions above the median of the distribution. The exercise shows that banks are in different development phases to assess the greenness of their exposures, in context of the EU taxonomy classification. Two estimation techniques—bottom-up estimates and top-down tool—have been considered in the exercise and the report on findings highlights the differences in outcomes. Given the outlined constraints and, based on a first estimate coming from the top-down tool, an EU-aggregated green asset ratio stands at 7.9%. The scenario analysis shows that the impact of climate risks across banks varies in magnitude and is concentrated in particular sectors. Tools for scenario analysis are quickly developing and further progress should be made on modeling the transmission channels of climate risk shocks to balance sheets of banks.
EBA conducted this pilot exercise on a sample of 29 volunteer banks from 10 countries, representing 50% of the total assets in the banking sector in EU. The exercise focused on the identification and quantification of exposures from a climate perspective, in particular, on transition risk. The scope of the exercise was narrowed to EU corporate exposures, for which climate-related information is expected to be easier to retrieve at this stage. Bank exposures were mapped and evaluated according to different classification approaches, including the EU taxonomy. Results of this pilot exercise and the experience gained in this process will represent the basis of a wider discussion on how to design a climate risk stress test for the banking sector in EU. Further interaction with the industry will be key to exploring possible solutions and identifying key challenges for developing methodologies and data requirements that would be suitable for this purpose. Overall, EBA will continue working, in line with its mandate, on the design of a climate risk stress test framework.
Keywords: Europe, EU, Banking, Climate Change Risk, ESG, Green Asset Ratio, Pillar 3, Disclosures, Basel, Sustainable Finance, Sustainable Economy, EBA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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