ECB climate stress test: Banks are overexposed, underprepared for climate risk.

The European Central Bank (ECB) announced the results of its climate stress test, indicating that banks urgently need to accelerate the incorporation of climate risk into their risk management frameworks, and that banks remain heavily exposed to emissions-intensive industries. The ECB launched the stress test early this year, aiming to assess banks’ preparedness for dealing with financial and economic shocks stemming from climate risk. The study reviewed information provided by 104 participating banks, assessing their own climate stress-testing capabilities, and their reliance on carbon-emitting sectors. For a subset of the banks, the ECB also asked for information on the impact on their performance under various transition scenarios, taking into account factors including increases in carbon prices, and from physical risks such as flood and severe heat. The report indicated that while banks have made progress in recent years to incorporate climate risk, significant work remains by most banks to sufficiently measure and manage climate-related risks. Nearly 60% of the banks examined do not yet include climate risk considerations in their stress testing frameworks, and only one-in-five currently consider climate risk when granting loans. The ECB said that banks need to work on improving the governance structures of their stress test frameworks, data availability and on their modelling techniques.