 Fit-for-55 Climate Scenario Analysis
The European Supervisory Authorities (ESAs) and the European Central Bank (ECB) have released a groundbreaking report, "Fit-for-55 Climate Scenario Analysis," assessing the EU financial sector's resilience to climate change under various scenarios.
 Limited First-Round Impact of Transition Risks, a sudden repricing of assets due to transition risk (a "run on brown") has a limited initial impact on financial stability.
Combining climate risks with adverse macroeconomic factors significantly increases financial institutions' losses, potentially hindering their lending capacity and the green transition's financing.
Banks face the largest losses, primarily due to credit risk, but their capital and hedging positions help mitigate the impact. They also have the potential to contribute to green financing under less severe scenarios.
Insurers and Institutions for Occupational Retirement Provision (IORPs) face moderate losses, mainly driven by changes in fixed-income asset values. Long-duration bond portfolios are particularly vulnerable to interest rate shocks. The report notes that its static balance sheet approach overestimates losses by not considering the impact on liabilities or mitigating hedging strategies.
Â
Â
Â
Â