- Boosting green investment significantly reduces medium-term costs and risks faced by households and firms.
- If the green transition is not accelerated, corporate profitability and household purchasing power will decline, and credit risk for banks will increase.
- Further delaying the transition would lead to a failure to meet the objectives of the Paris Agreement and amplify the impact of costly physical risks.
The European Central Bank (ECB) today published the results of its second economy-wide climate risk stress test. The results suggest that the best way to achieve a net-zero carbon economy for euro area companies, households and banks would be to accelerate the green transition at a rate faster than foreseen by current policies.
"We need more determined policies to ensure a faster transition to a zero-carbon economy in line with the objectives of the Paris Agreement. Risks and costs to the economy and the financial system will increase if changes continue at the current pace. It is clear that more speed is needed to achieve the goals of the Paris Agreement," said European Central Bank Vice-President Luis de Guindos.
The stress test analyses the resilience of firms, households and banks in three transition scenarios that differ in terms of timing and ambition:
- "accelerated transition", which catalyses green policies and investments, leading to a reduction in carbon emissions by 2030 in line with the objectives of the Paris Agreement;
- "transition with a later acceleration", which continues to follow the current path, with acceleration taking place only in 2026 (which is nevertheless sufficiently intensive to achieve a reduction in carbon emissions in line with the Paris Agreement by 2030);
- "delayed transition", which also starts only in 2026, but is not ambitious enough to achieve the goals of the Paris Agreement by 2030.
The results suggest that a faster transition would bring clear benefits to businesses and households. While a faster transition would initially imply higher investments and higher energy costs, financial risks would decrease significantly in the medium term. The negative impact on profits and purchasing power would be smaller, as accelerated investments in renewable energy would be paid off earlier, ultimately reducing energy expenditure. In an accelerated transition scenario, green investment by euro area firms would rise to EUR 2tr by 2025, compared to just EUR 0.5tr in the other two scenarios. In a transition scenario with a later acceleration, green investments would catch up with the accelerated transition by 2030, reaching a total of EUR 3tr in both scenarios, while in a delayed transition scenario these investments would be smaller. For this to happen, green investment would have to grow rapidly, which would increase risks for businesses, especially in energy-intensive sectors such as manufacturing, mining and electricity, with an average euro area firm generating twice as much debt and half as much profit.
When businesses are at risk, the same happens to banks that lend to them. Banks are exposed to the highest credit risk if the transition has to be accelerated at a later stage and faster investments at higher costs are needed. In the transition scenario with a later acceleration, banks can expect their credit risk to increase by more than 100% in the period from 2022 to 2030, and in the accelerated transition scenario, this increase is only 60%.
Moreover, delaying the transition and failing to take any action would lead to even higher costs and risks in the long run. While this would imply lower overall investment costs, not meeting the carbon reduction targets would significantly worsen the impact of physical risk on the economy and the financial sector.
The second economy-wide climate risk stress test builds on the results of the first economy-wide stress test published in September 2021. Given its broader scope and a top-down view of firms, households and the banking sector, the current exercise complements the climate risk stress test conducted by ECB Banking Supervision, which provided a bottom-up analysis of individual banks’ risks in July 2022. The ECB’s‑economy-wide climate risk stress test is part of the ECB’s climate plan and ongoing work to improve understanding of climate risk.
Contact for media inquiries Clara Martín Marqués, phone: +49 69 1344 17919.
