EBA publishes results of EU-wide pilot exercise on climate risk

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.