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ECB economy-wide climate stress test: Banks’ Credit Risk Doubles by 2030 Under Slower Climate Transition

According to new findings by the European Central Bank (ECB), banks’ credit risk could rise by more than 100% by 2030 if initiatives to hit global climate goals are pushed off to the second half of the decade while in the accelerated transition, the increase is only 60%.

The second economy-wide stress test focuses on the transition to a net zero economy, analyzing the resilience of banks, firms, and households to three transition scenarios, which differ in terms of timing and ambition:

  • an “accelerated transition”, which frontloads green policies and investment, leading to a reduction in emissions by 2030 in line with the goals of the Paris Agreement;
  • “late-push transition”, which continues on the current path but does not speed up until 2026 (and is still intense enough to achieve Paris-aligned emission reductions by 2030);
  • “delayed transition”, which also starts only in 2026 but is not sufficiently ambitious to reach the Paris Agreement goals by 2030.

The results also show the benefits of a faster transition to renewable energy for firms, households and banks. It notes that while a rapid transition requires higher initial investment and energy costs, it significantly reduces financial risks in the medium term. This is because early investments in renewables pay off sooner and reduce energy expenses.

In energy-intensive sectors such as manufacturing, mining, and electricity, firms face increasing risks as green investments must grow rapidly, leading to rising debt levels and significantly lower profits compared to the average firm in the euro area.

However, delaying the transition, and not acting leads to even higher costs and risks in the long run. While it entails less investment overall, missing emission reduction targets exacerbates the impact of physical risk on the economy and the financial sector significantly.

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