European Central Bank climate 'stress tests' show clear benefits of early action
Wed 22 September 2021
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The results of an economy-wide 'stress test' from the European Central Bank show that there are clear benefits of acting early on climate change. The ECB says that the "short-term costs of the transition pale in comparison to the costs of unfettered climate change in the medium to long term".
The Bank says that the early adoption of policies to drive the transition to a zero carbon economy also brings benefits in terms of investing in and rolling out more efficient technologies.
The results of the 'stress test' also show that, although the effects of climate risks would increase moderately, on average, until 2050 if climate change is not mitigated, they are concentrated in certain geographical areas and sectors. Additionally, the results show that if policies to transition towards a greener economy are not introduced, physical risks become increasingly higher over time: they will increase non-linearly, and due to the irreversible nature of climate change such an increase will continue over time.
The Bank says that "it is thus of foremost importance to transition early on and gradually, to mitigate the costs of both the green transition and the future impact of natural disasters".
The risk for corporates and banks most exposed to climate risks, the ECB says, is potentially very significant, especially in the absence of further mitigating policies. If climate risks are not reduced, the costs to companies arising from extreme weather events would rise substantially, and significantly and negatively affect their creditworthiness.
Climate change thus represents a "major source of systemic risk, particularly for banks with portfolios concentrated in certain economic sectors and, more importantly, in specific geographical areas".
The ECB’s economy-wide climate stress test is the first step in the ECB’s climate roadmap. The results and methodology will inform a 2022 supervisory climate stress test for the banks that the ECB directly supervises.
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