Supervisors across Europe are evolving climate stress testing from experimental pilots to strategic tools shaping financial resilience and policy.
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A senior European
banking executive has warned that a shift in regulatory mindset threatens to
leave the financial sector playing catch-up in dealing with the challenges of
climate risk.
In a detailed address
to climate risk professionals at CeFPro’s recent European Climate Stress
Testing conference, a senior figure at the European Banking Authority (EBA)
shared insights into the evolution, current state, and future direction of
climate stress testing from a supervisory perspective.
As climate-related financial risks continue to gain
prominence, the supervisory community has moved from early learning exercises
to more structured frameworks that it hopes will ensure the banking sector is
prepared for a low-carbon transition.
The early landscape of climate risk testing was
defined by exploratory initiatives – top-down pilot exercises launched by
central banks and regulators across Europe.
These efforts include notable projects by De
Nederlandsche Bank (DNB), the European Systemic Risk Board (ESRB), and the
European Insurance and Occupational Pensions Authority (EIOPA) and were
intended primarily to raise awareness, test data availability, and develop
preliminary methodologies.
None of these exercises, however, were intended to
influence capital requirements.
Even the 2022 bottom-up exercise led by the European
Central Bank’s Single Supervisory Mechanism (SSM) served a qualitative purpose,
offering banks guidance and benchmark methodologies while steering them through
a rapidly evolving risk landscape.
One significant milestone came with the EBA’s 2020
pilot exercise. This effort sought to classify the sustainability of banks’
exposures using available climate data, focusing on non-SME corporate exposures
where emissions data was more accessible.
The analysis revealed that approximately 55% of such
exposures could be considered climate-relevant, with 42% showing high
greenhouse gas emissions intensity.
The pilot established a much-needed baseline from
which more sophisticated analyses could evolve.
Despite this progress, several limitations remain.
Climate data, particularly for SMEs and retail exposures, is still incomplete,
often reliant on proxies or sectoral averages.
Scope 3 emissions are inconsistently estimated, and
physical risk data lacks granular detail, often missing precise asset location
details, all of which affects both comparability and the robustness of stress
test outcomes.
