The pilot test framework will be macroprudential in nature, and allow us to analyse the system-wide materiality of transition risks for banks’ solvency, along with their lending capacity and the implications for the overall economy. The eventual aim is to incorporate both physical and transitional risks, and investigate how these two types of risks interact with each other.
This type of analysis still faces some major barriers. There is no consistent classification of firms’ activities and the data on banks’ exposures is not granular enough. We expect this to improve, however, since banks clearly need to treat risks from climate change in the same fashion as other financial risks.