European Central Bank launches indicators to monitor climate risk for banks and investors

The European Central Bank (ECB) published last week a series of new statistical indicators aimed at helping to analyze climate-related risks in the financial sector and track the progress of the sustainable finance market. “We need a better understanding of how climate change will affect the financial sector, and vice versa. For this, the development of high-quality data is key.” said Isabel Schnabel, ECB Executive Board member.

The new indicators are either experimental or analytical (note 1) and the data sets - exclusively relate to the euro area - cover three topics, as follows:

• Sustainable finance. Overview of debt instruments labelled as “green”, “social”, “sustainability” or “sustainability-linked”. The volume has more than doubled over the last two years and grew much faster than the overall euro area bond market. In spite of the lack of internationally accepted standards, these indicators provide transparency and help track progress on the transition to a net-zero economy.

• Carbon emissions financed by financial institutions. Information on the carbon intensity of the securities and loan portfolios and on the financial sector’s exposure to counterparties with carbon-intensive business models. Preliminary results show that most of the emissions financed via equity or bonds are held by investment funds. However, the data suggest that the most carbon-intensive activities are financed via the banking sector.

• Climate-related physical risks. Analysis of the impact of natural hazards, such as floods, wildfires or storms, on the performance of loans, bonds and equities portfolios. While the risk of windstorms broadly affects European financial portfolios, the risk of this hazard causing severe damage is rather low. In contrast, floods are limited to coastal and river areas but are estimated to have a higher level of damages and losses.

Click at the image below to read more and see details of climate-related statistical indicators, challenges and difficulties and specially, the data sources (mix of existing data from ESCB European System of Central Banks, other publicly available and proprietary data sources).

Note 1: Analytical indicators here are data that are at a research stage and have not yet reached the quality of experimental statistics but are already considered relevant if used with care and accompanied by suitable explanation and caveats. About experimental indicators a detailed description of this classification is available on the ECB’s website.