The climate strategies of Luxembourg’s banks and investment funds are “timid, or even non-existent,” finds an analysis published in the Banque Centrale du Luxembourg’s (BCL) latest Financial Stability Review. Despite significant exposure to low-carbon transition risks “it seems that there are no significant adjustments in the banking sector towards a reduction of climate risk,” the central bank says.
The study finds that Luxembourg is among the EU countries most affected by the physical effects of climate change. Financial losses caused by weather or climate events amounted to €718m or €1,627 per person between 1980 and 2017.
However 59% of these losses were insured and bank exposures are mainly concentrated in geographical areas with low vulnerability to extreme weather events. As a result, the country’s main banks seem to have little exposure to physical climate risk.
In contrast, the analysis found the financial risks associated with the transition to a low-carbon economy are “significant” and that Luxembourg’s banks are particularly sensitive to this type of risk due to their high exposures to non-financial and carbon-intensive companies.
An analysis of loans by economic sector shows a constant increase in carbon-related lending over the last five years, reaching 46% of all lending in December 2020. An analysis of debt securities also shows growth in exposure to high-carbon assets, increasing by 33% since 2016.
Acknowledging that the combination of physical and transition climate risks is difficult to assess due to uncertainty, complexity and lack of data, the BCL is nevertheless clear on the potential impacts.
“The impact of economic activities on the climate has increased over time, causing an emergency situation with the amplification of climate risk and its various repercussions,” the Financial Stability Review warns, and “transition risk could significantly impact the financial market in the event of a tightening of environmental policies and measures”.
“It is essential that public and supervisory authorities act in a manner coordinated to ensure that the country’s financial actors develop appropriate tools to the assessment and monitoring of climate risks on their activities and on their asset portfolios,” it says.
The BCL is a member of the European System of Central Banks and BCL President Gaston Reinesch is a voting member of the European Central Bank’s Governing Council.
This page was last updated September 20, 2021
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