By Omotayo Edubi
A sudden jump in carbon prices coupled with floods and droughts this year would lead to losses of at least 70 billion euros ($71.1 billion) for the euro zone’s largest banks, the European Central Bank said on Friday.
The ECB said the estimate in its first climate stress test significantly understated actual losses for the 41 banks in the sample because it focused only on credit and market risk and did not take account of indirect effects such as an economic downturn.
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Banks and other companies are under increasing pressure from shareholders and environmental groups to act quickly to reduce the carbon footprint of their activities.
The central bank’s test also found that most euro zone banks did not have a framework for modelling climate risk and did not typically take it into account when granting loans.
“Euro area banks must urgently step up efforts to measure and manage climate risk, closing the current data gaps and adopting good practices that are already present in the sector,” said the ECB’s chief supervisor, Andrea Enria.
