This report “Risks from misalignment of banks’ financing with the EU climate objectives” prepared by the European Central Bank focuses on the transition risks stemming from banks’ credit portfolios. As the transition to a decarbonised economy progresses, corporations in energy or carbon-intensive sectors may face growing challenges, which can make them more likely to default on their financial obligations or increase the loss given default through reduced collateral value. These transition risks are drivers of credit, market, operational and liquidity risk.
Corporations in energy-intensive or CO2-intensive sectors to which financial institutions supply credit could experience reduced competitiveness as the transition towards a decarbonised economy takes place. The risk of default is highest in a delayed transition scenario, which would require abrupt government action and rapid adjustment by corporations. It is thus vital for financial institutions to assess the risks arising from the transition towards a decarbonised economy. Assessing alignment is broadly accepted as an approach for identifying and quantifying banks’ transition risks. The Paris Agreement Capital Transition Assessment (PACTA) tool is the most common method used by banks to assess the alignment of corporations.
Access the complete report here
