Climate stress testing will support a greening of bank balance sheets
Based upon its economy-wide climate stress test results, the ECB concluded this week that climate change will be a major source of systemic risk to banks if no action is taken, particularly for those highly exposed to economic sectors and/or geographical areas most at risk. But this presents opportunities for banks too. Those which help companies finance their transition towards more sustainable business models will enable them to increase the taxonomy compliance of their lending books. And that will, in turn, support the issuance of green bonds by banks, including those under the upcoming European green bond standard.
The ECB’s climate stress testing framework will provide additional incentives for banks to green their balance sheets
The ECB’s results of its climate stress tests provide valuable insight into the vulnerabilities banks face as far as climate risks and their exposure to non-financial companies are concerned. It’s the first step in the central bank’s roadmap towards a climate stress-testing framework. It will be followed by a separate supervisory climate stress test of individual banks in 2022, which should result in the introduction of a more regular climate stress-testing of banks in the following couple of years. The climate stress test of the euro-system balance sheet is scheduled for the first quarter of next year.
We believe the ECB’s climate stress testing framework will form an increasingly important additional incentive for banks to green their balance sheets in the years to come. Furthermore, banks that are more exposed to climate risks are likely to face increasing pressure to prepare for those risks which will potentially involve them building up climate capital buffers.