On 18 December 2023, the European Central Bank and the European Systemic Risk Board issued a report, Towards macroprudential frameworks for managing climate risk.
The report sets out three interrelated macroprudential frameworks for climate risks:
- A surveillance framework that tracks financial stability risks emanating from climate change shocks, along with exposures to these shocks and their interplay with financial risk. Among other things, the report notes that the share of high-emitting economic sectors in bank lending is around 75% higher than its equivalent share in economic activity, while more than 60% of banks’ interest income is derived from firms operating in the most carbon-intensive sectors.
- A second framework which leverages evidence on financial stability risks as the basis for a macroprudential strategy for climate change, alongside a preliminary operational design based on existing instruments. All in all, a common EU approach is essential to avoid fragmentation and appropriately tackle a common risk which is global in nature. Prudential policies will need to tackle heterogeneity to improve the overall efficiency of policy response against systemic climate risks. Close coordination of policy responses across countries and sectors, especially within the EU, will be essential if systemic climate risks are to be addressed efficiently, by limiting the risk of spill-overs, uncertainty and distortions that might result from a more fragmented approach.
- A framework taking a first look at nature-related risks. There is provided a conceptual overview of nature-related risks by laying out concepts, EU case studies and various initiatives among EU institutions. Much like climate risk, nature risks have both a physical aspect (resulting from the degradation of nature) and a transition aspect (resulting from measures to protect, restore or reduce physical impacts).