On 19 November 2024, the European Supervisory Authorities (ESAs) together with the European Central Bank (ECB) issued the results of the one-off ‘Fit-for-55’ climate scenarios analysis.

Fit-for-55

The ‘Fit-for-55’ package is a set of legislative proposals and policy initiatives designed as part of the European Green Deal with the aim of ensuring that EU policies are aligned with the climate goals agreed by the European Council and the European Parliament. More precisely, ‘Fit-for-55’ refers to the EU’s target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to the 1990 levels. The EU commitment is to transition to a climate-neutral economy by 2050.

Climate risk analysis

The objective of the ‘Fit-for-55’ climate risk analysis was to assess the resilience of the EU financial sector to climate and macro financial shocks, while the ‘Fit-for-55’ package is being smoothly implemented in the EU. The exercise was based on three scenarios that were developed by the European Systemic Risk Board (ESRB). It is part of the ESAs and ECBs’ joint effort to develop more advanced methodologies to better capture climate risks, in light of the urgency of the challenges posed by climate change. Additionally, it allows to gain insights into the financial sector’s capacity to support the green transition even under conditions of stress.

The three scenarios were:

  • The baseline scenario, the ‘Fit-for-55’ package is implemented in an economic environment that reflects the ESRB’s June 2023 forecasts, while still facing additional cost related to the green transition.
  • The first adverse scenario, transition risks materialise in the form of ‘Run-on-Brown’ shocks, whereby investors shed assets of carbon-intensive firms. This hampers the green transition, since ‘brown’ firms do not have the financing they need to green their activities.
  • The second adverse scenario, the ‘Run-on-Brown’ shocks are amplified with other standard macro-financial stress factors.

Findings

The results of the exercise show that estimated losses stemming from a ‘Run-on-Brown’ scenario have a limited impact on the EU financial system.

The banking sector records first-round credit and market losses amounting to 5.8% of total exposures in scope, equivalent to EUR 343 billion, under the baseline scenario. In the first adverse scenario, the run on brown results in total losses of 6.7% relative to total exposures in scope, bringing total losses to EUR 393 billion. The second adverse scenario leads to total losses of 10.9% relative to total exposures in scope, totalling EUR 638 billion.

EU investment funds undergo a fall in value of 4.0% of initial total exposure in the baseline scenario, or around EUR 396 billion, driven largely by declines in the values of equities held by the funds. In the second adverse scenario, the additional effect of a sharp, exogenous deterioration in the macroeconomic environment drives an overall immediate decline of 15.8% (EUR 1 563 billion). EU funds experience similar overall declines in asset values to the rest of the global investment fund sector in all scenarios.