Goals
The European Commission has invited the ESAs and the ECB to assess the impact on the EU banking, investment funds, occupational pension funds and insurance sectors of three transition scenarios incorporating the implementation implementation of the “Adjustment to Target 55” package, as well as the possibility of contagion and amplification effects throughout the financial system. The European Union’s Fit to Target 55 package aims to boost investment and innovation in the transition to a green economy and plays a key role in the EU’s goal of achieving a reduction emissions by 55% by 2030 and climate neutrality by 2050. It aims to bring EU legislation into line with these objectives through a set of policies covering, among others, system Emissions Trading Scheme, the Carbon Border Adjustment Mechanism, sectoral emissions targets, as well as revisions to the Renewable Energy and Energy Efficiency Directive.
Scenarios and methodology
The climate stress test was carried out based on three scenarios developed by the European Systemic Risk Board (ESRB), with the support of the ECB. The scenarios integrate transition risks as well as macroeconomic factors, assuming that the “Adjustment to Objective 55” package is implemented as planned.
• In the reference scenariothe “Adjustment to Target 55” package is implemented in an economic environment that reflects the ESCB’s June 2023 forecast, while still facing additional costs linked to the green transition.
• In the first unfavorable scenariotransition risks materialize in the form of shocks “ Run-on-Brown ”, during which investors divest from the assets of carbon-intensive companies. This slows down the green transition, because “brown” companies do not have the necessary financing to green their activities.
• In the second unfavorable scenariothe shocks “ Run-on-Brown » are amplified by other classic macro-financial tension factors.
In order to measure the impact of the scenarios on the respective financial sectors (the so-called “first round effects”) and to assess the possibility of contagion and amplification effects throughout the financial system (the so-called “first round effects”) second round”), the ESAs and the ECB used top-down models (top-down models). Estimates are established using granular data and cover an 8-year time horizon (2022 to 2030). The ESA and ECB models cover loans to non-financial corporations (NFCs), equities, debt securities (including government bonds) and fund participations held by a sample of financial institutions composed of of 110 banks, 2,331 insurers, 629 occupational retirement institutions (IRP) and around 22,000 funds domiciled in the EU.
Results
The results of the exercise show that the losses estimated in a “ Run on-Brown » have a limited impact on the EU financial system. Over the 8-year horizon, total first-round losses stand between 5.2% and 6.7% of initial exposures, in each sector. Second-round losses are mainly relevant for investment funds and amount to 11.2% of initial exposures.
The interaction between adverse macrofinancial developments and factors related to transition risk could disrupt the evolution of the transition and significantly increase the losses of financial institutions, thus compromising their financing capacity. This situation is assessed in the second unfavorable scenario in which shocks “ Run-on-Brown » are associated with unfavorable macroeconomic conditions. In this scenario, first-round losses recorded by banks, insurers, occupational pension funds and investment funds are between 10.9% and 21.5% depending on the sector. Although significant, the impact of these losses on the capital of financial institutions is expected to be mitigated by factors such as the income of banks, the liabilities of insurers and professional pension funds, and the liquidity held by funds. investments that were not included in the assessment.
Given the novelty of the methodological approaches and the difficulties associated with the data, the results are surrounded by a large margin of uncertainty.
This exercise is the result of a fruitful collaboration between EU institutions and supervisory authorities and provided a concrete opportunity to assess climate risks from a joint perspective that aligns methodologies and analytical tools while leveraging the sectoral expertise. Its findings can help policymakers develop measures that ensure sufficient financial resources for the real economy to advance the green transition, while reducing risks within the financial system.
For any requests for information, the media can contact Clara Martín Marqués
au : +49 69 1344 17919.
