EU supervisors to test financial system’s ability to meet climate goals

March 21, 2023|Written by |European Central Bank

The European Commission has asked a variety of financial regulators to conduct a one-off climate risk scenario analysis to assess the resilience of the EU’s financial system in light of the EU’s 2030 climate targets. The EU has targeted reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 level, known as Fit for 55, and reaching carbon neutrality by 2050.

The request came in a letter from John Berrigan, the commission’s director responsible for financial stability. The question the commission hopes to answer is whether, or to what extent, meeting these targets will affect the financial system, providing a better understanding of any vulnerabilities. It also hopes to gain insights into the financial system’s capacity to support green investments under stress.

According to Berrigan, the “exercise should go beyond the usual climate stress tests, as a cross-sectoral exercise looking also at contagion and second-round effects”. The European supervisory authorities (ESAs), the European Central Bank (ECB) and the European Systemic Risk Board (ESRB) will all participate.

Julia Symon, head of research and advocacy at the civil society group Finance Watch, explained the importance of this joint effort. These regulators are “sectoral supervisors each responsible for specific financial institutions, so they need to work together and coordinate”, she said, and this is the first “system-wide” effort to understand climate-related financial risks.

The regulators are expected to test on two scenarios covering the period up to 2030. One scenario will focus on climate-related risks that are likely to materialise in the near term, while the second will combine risks with other stress factors. The regulators will use the same scenarios, which will be developed by the ESRB’s taskforce on stress testing.

This exercise is in addition to other efforts already underway. The ECB, European Securities and Markets Authority, and Europe Insurance and Occupational Pensions Authrotiy have individually conducted climate stress tests. Based on the results, the ECB has set a March deadline for regulated institutions to catalogue their climate and environmental risks, and to act on those assessments by the end of the year. In addition, the European Securities and Markets Authority intends to implement sustainability reporting standards.

The commission hopes that policy conclusions and recommendations will be produced no later than the first quarter of 2025. This date aligns with the seating of a new commission, as ministers will be elected in 2024.

This page was last updated March 21, 2023

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