This tool has been selected owing to its forward-looking nature and its ability to incorporate alternative scenarios. In an initial stage, the aim is to assess the risks entailed by the environmental transition, leaving physical risks for a second phase. Specifically, we need a tool that can analyse the different policies or events for which there is no past experience and whose impact extends over a lengthy timeframe (around five years). Examples of the type of scenarios would be policies that internalise the social costs of pollution at emitting agents, technological innovations that further reduce the cost of using renewable energy sources and shifts in agents’ preferences towards more environmentally sustainable goods and services. Given the complexity of this matter, an iterative modular approach has been adopted through which the macroeconomic effect of these shocks and policies can be analysed separately, so as to then calibrate the impact of changes in the macroeconomic environment on banks’ income statements and solvency. The macroeconomic module includes a general equilibrium model with a substantial sectoral breakdown, in which economic agents interact. In this way it is possible to take account of the changes in the sectoral structure of the economy triggered by the transition, with the least pollutant sectors gaining weight to the detriment of the most pollutant sectors, whose emissions decrease. The banking module models the different credit risk parameters (PDs, LGDs, etc.) on the basis of the sectoral and aggregate macroeconomic variables provided by the macro module, enabling projections of banks' income statements to be obtained.
As regulator, our mandate is to ensure the financial stability of the economy. In this regard, our competencies as micro- and macroprudential supervisor require us to be able to assess and quantify the risks entailed by the transition to a more sustainable economy, both for each individual bank and for the financial sector as a whole. Indeed, the transformative measures to change our productive model will affect bank borrowers. In some cases, they will give rise to opportunities, but there is no way of hiding that these transformations will adversely impact the business model of certain sectors. Therefore, it should come as no surprise that as supervisors we require that banks measure the risks derived from the transition process and incorporate them into their management. It is well known that the ecological transition process entails two types of risk: (i) physical risks, caused by the direct effects of climate change, storms, floods and natural disasters, and (ii) transition risks, which refer to the potential effect on specific borrowers of technological changes, changes in customer behaviour and preferences and the regulatory measures taken precisely to prevent physical risks from materialising. The measurement of these risks poses significant challenges. For example, the long time horizon over which the effects of physical risk are observed far exceeds that used to measure conventional banking risks.