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Nepomuk Dunz

20 May 2022
The analysis of the conditions under which, and extent to which climate-adjusted financial risk assessment affects firms’ investment decisions in the low-carbon transition, and the realisation of the climate mitigation trajectories, still represent a knowledge gap. Filling this gap is crucial to assess the “double materiality” of climate-related financial risks. By tailoring the EIRIN Stock-Flow Consistent model, we provide a dynamic balance sheets assessment of climate physical and transition risks for the euro area, using the climate scenarios of the Network for Greening the Financial System (NGFS). We find that an orderly transition achieves important co-benefits already in the mid-term, with respect to carbon emissions abatement, financial stability, and economic output. In contrast, a disorderly transition can harm financial stability, thus limiting firms’ capacity to invest in low-carbon activities that could decrease their exposure to transition risk and help them recover from climate physical shocks. Importantly, investors’ climate sentiments, i.e. their anticipation of the impact of the carbon tax across NGFS scenarios, play a key role for smoothing the transition in the economy and finance. Our results highlight the importance for financial supervisors to consider the role of firms and investors’ expectations in the low-carbon transition, in order to design appropriate macro-prudential policies for tackling climate risks.
JEL Code
B59 : History of Economic Thought, Methodology, and Heterodox Approaches→Current Heterodox Approaches→Other
Q50 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→General
22 September 2021
Climate change is one of the greatest challenges facing humankind this century. If left unchecked, it is likely to result in more frequent and severe climatic events, with the potential to cause substantial disruption to our economies, businesses and livelihoods in the coming decades. Yet the associated risks remain poorly understood, as climate shocks differ from the financial shocks observed during previous crises. This paper describes the ECB’s economy-wide climate stress test, which has been developed to assess the resilience of non-financial corporates (NFCs) and euro area banks to climate risks, under various assumptions in terms of future climate policies. This stress test comprises three main pillars: (i) climate-specific scenarios to project climate and macroeconomic conditions over the next 30 years; (ii) a comprehensive dataset that combines climate and financial information for millions of companies worldwide and approximately 1,600 consolidated euro area banks; (iii) a novel set of climate-specific models to capture the direct and indirect transmission channels of climate risk drivers for firms and banks.
JEL Code
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
C55 : Mathematical and Quantitative Methods→Econometric Modeling→Modeling with Large Data Sets?
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming