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Published on Monday, October 4, 2021

Europe | Climate resilience: better from now on

The European Central Bank (ECB) recently published the detailed results of its climate stress test on both banks and non-financial companies in the euro area. The exercise was designed around three main pillars.

Key points

  • Key points:
  • First, three different climate scenarios, internally consistent but with a different combination of physical risks (floods, droughts, wildfires) and transition risks (triggered by the cost of reducing emissions).
  • Second, highly granular data — on emissions by economic activity; and even down to ZIP code level on exposure to physical risks.
  • Finally, all this information is included in different models, along with financial data on firms and banks, to forecast the impact of each of the three reference scenarios on their balance sheets and income statements.
  • The biggest negative total and long-term effects occur when there are no climate policies in place, as shown by the higher frequency of extreme climate events resulting from the rise in global temperatures. So, it is worth taking on the costs of climate change now—in order to mitigate its impact and help us adapt to it—and as a result try to reduce climate risks in the future.

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