The European Banking Authority (EBA) published today the
findings of its first EU-wide pilot exercise on climate risk, whose main
objective is to map banks’ exposures to climate risk and provide an
insight into the green estimation efforts banks have carried out so far.
The findings give a clear picture of banks’ data gaps and highlight the
sense of urgency to remedy them if they are to achieve a meaningful and
smooth transition to a low-carbon economy. It is only through a more
harmonised approach and common metrics that banks’ efforts will prove
meaningful in addressing and mitigating the potentially disruptive
impacts of environmental risks. The findings also show big differences
in banks’ application of the EU taxonomy. A first estimate of the
starting point of their green asset ratio (GAR) estimated with a
top-down tool currently stands at 7.9%.
Summary of key results
Overall, the findings show that more disclosure on transition
strategies and greenhouse gas (GHG) emissions would be needed to allow
banks and supervisors to assess climate risk more accurately. In
addition, the results highlight the importance for banks to expand their
data infrastructure to include clients’ information at activity level.
This is particularly crucial as for the 29 banks in the sample, more
than half of their exposures to non-SME corporates (58% of total) are
allocated to sectors that might be sensitive to transition risk. A
parallel analysis, based on GHG emissions, reveals that 35% of banks’
total submitted exposures are towards EU obligors with GHG emissions
above the median of the distribution.
Banks’ disclosures will be reinforced following the EBA draft
technical standards on Pillar 3 disclosures on climate-change and ESG
related risks, including the definition of the green asset ratio (GAR),
currently under consultation[1], which will allow stakeholders to assess bank’s ESG related risks and sustainability strategy[2] and to promote market discipline.
Regarding the EU taxonomy classification, banks are currently in
different development phases to assess the greenness of their exposures.
Two estimation techniques, banks’ bottom-up estimates and a top-down
tool, are considered in the exercise and the report highlights the
differences in outcomes. Given the outlined constraints and based on a
first estimate coming from a top down tool, an EU aggregated GAR stands
at 7.9%.
The scenario analysis shows that the impact of climate-related risks
across banks has different magnitudes and is concentrated in some
particular sectors. Tools for scenario analysis are quickly developing
and further progress should be made on modelling the transmission
channels of climate risk shocks to banks’ balance sheets.
Despite the appreciated efforts made by the volunteer banks in the
sample, given the data gaps and the various approaches used, the
findings presented in the Report should be considered as starting point
estimates for future work on climate risk. The EBA will continue to work
actively on measuring and assessing climate related risks in the
banking sector and these findings are a key starting point in view of
building up consistent and comparable climate risk assessment tools,
which will help banks quantify the amount of exposures that might
require managerial attention from a transition perspective.
Notes to the editors
The EU-wide pilot exercise was run by EBA on a sample of 29 volunteer
banks from 10 countries, representing 50% of the EU banking sector’s
total assets, which provided raw data on non-SME corporate exposures to
EU domiciled obligors[3].
The exercise focused on the identification and quantification of
exposures from a climate perspective, in particular, on transition risk.
The scope of the exercise is narrowed to EU corporate exposures, for
which climate related information are expected to be easier to retrieve
at this stage. Banks’ exposures were mapped and evaluated according to
different classification approaches, including the EU taxonomy. The
latter was applied by banks directly and complemented with a top-down
classification tool run by the EBA. Finally, a scenario analysis based
on a joint EBA/ECB tool was also used to explore modelling options
regarding the transmission mechanism between the shocks coming from
climate risk scenarios, as defined by the Network for Greening the
Financial System (NGFS) and banks’ balance sheets.
[3] Exposures to obligors located in Norway and United Kingdom are also included in the analysis.