A study has found exposure to climate-related risk is concentrated in a small number of lenders.
According to the research, conducted by the European Central Bank (ECB) and the European Systemic Risk Board (ESRB), exposures to high-emission companies account for 14% of the combined balance sheets of eurozone banks. However, just 25 banks hold 70% of the entire banking system’s credit exposures to companies facing high climate-related risk.
“Financial stability vulnerabilities from climate change [are] concentrated in certain regions, sectors and firms,” the ECB said in a press release announcing the report. “Granular exposure mapping of climate hazards to financial risk reveals vulnerability to river flooding widespread across countries, compounded by wildfire, heat and water stress risk in some regions.”
The study mapped physical climate risks such as flooding and drought to the addresses of 1.5 million eurozone companies.
Large investment funds are more exposed to climate risks, the study finds, with over 55% of their total investments in high-emitting companies. The report shows that insurance might not be a buffer to many of these risks, especially during a systemic shock, and points out that only an estimated 35% of climate-related economic losses is currently insured in the EU.
The study also applied a scenario analysis involving projected modelling, finding that in the event of a disorderly climate transition, physical risk losses would become dominant within around 15 years, leading to a decline in global GDP of up to 20% by the end of the century.
The joint ECB/ESRB study follows recent research from the Danmarks Nationalbank that found highly concentrated risk comes from collateralised real estate vulnerable to flooding, with consequent risk to financial stability.
Another study from Reclaim Finance found that the 11 largest banks in the eurozone are highly exposed to a collapse in fossil fuel asset values, with potential contagion effects threatening financial stability.
This page was last updated July 15, 2021
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