The European Central Bank (ECB) launched a stress test today to assess banks’ preparedness for financial and economic shocks caused by climate risks.
“The stress test is an opportunity for banks and regulators to identify vulnerabilities and best practices of credit institutions in managing climate-related risks and to better understand the challenges they face,” explained the ECB in a statement.
The 2022 ECB Climate Risk Stress Test will target specific asset categories exposed to climate change, but not the entire financial portfolio of banks. Test scenarios will reflect possible future climate policies and will assess both the physical risks (such as heatwaves, droughts and floods). Short- and long-term risks arising from the transition to a greener economy will also be taken into account.
“It is important to note that this is not a pass/fail exercise and will not affect banks’ capital levels,” the Frankfurt-based institution said.
More focus on climate change
The launch of the stress test comes at an important moment for climate change in Europe. The issue was recently named one of the EU’s top challenges by Europeans, with growing concern about implementing climate-friendly policies.
In February, the Intergovernmental Panel on Climate Change (IPCC) will begin to release its Sixth Assessment Report concerning climate change. These reports are released every six to seven years, meaning 2022 will see the first report released since the adoption of the Paris Agreement in 2015.
The results of the ECB’s stress test will be released in July. Once published, it will give better insight as to how the banks will operate during climate risks and may aid in influencing further decisions.