How climate change drivers affect financial firms in the EU

The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) published a join report on climate-related risk and financial stability. It states three forms of risk concentration:

A.- Physical climate hazards: are concentrated at the regional level, with more vulnerability to river flooding, wildfire, heat and water stress risk. Around 30% of the euro area banking sector’s credit exposures to non-financial companies are to firms that are subject to a combination of these physical hazards.

B.- Emission-intensive firms: occupy 14% of collective euro area banking sector balance sheets. It is mainly concentrated in the manufacturing, electricity, transportation & construction sectors.

C.- Climate risk drivers: are concentrated in specific financial intermediaries. Around 70% of banking system credit exposures to firms subject physical risk are concentrated in 25 banks. Scope for financial market repricing associated with transition risk will be particularly large for investment funds. EU Taxonomy stands at only 1% of assets.

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