Countering financial greenwash requires better information and enhanced standards, the European Central Bank (ECB) has said in its latest financial stability review. Enhancing the long term resilience of the financial system requires managing climate risk and strengthening the regulatory framework for banks and non-banks, emphasising growing climate vulnerabilities among both banks and insurers.
The results of the ECB’s recent economy-wide climate stress test show the benefits of a “timely and orderly transition” to mitigate climate-related vulnerabilities, the review said, pointing to the European floods and wildfires earlier this year as an example of the financial impacts of climate-related hazards.
Such natural catastrophes impact insurers as well as lenders, the review found. “From a systemic perspective, insufficient and potentially diminishing insurability of climate-related risks and associated risk pooling could significantly amplify future economic losses.”
The ECB’s review of the banking system found profitability recovering from the effects of Covid-19, with fewer banks receiving a negative outlook from rating agencies. However, the share of institutions receiving a positive rating outlook has not changed, the bank said, indicating that the banking sector is still considered vulnerable to other structural problems, including climate-related disruption.
Insurers are already seeing a substantial increase in climate-related losses, and 2021 will be one of the most expensive years ever for extreme weather events, according to the ECB. Increasing climate risks may lead to loss of coverage in the medium term, with amplifying effects on the macroeconomic and fiscal impact of climate-related natural catastrophes.
The publication of the financial stability review coincides with that of the ECB’s monthly banking supervision newsletter, focusing heavily on the upcoming climate stress test for Eurosystem banks and other climate-related issue
This page was last updated November 18, 2021
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