Recently, a Task Force on Climate-related Financial Risks that operates under the Basel Committee on Banking Supervision looked into the effects of physical and transition risks on banks. This task force, which I have the honour to co-chair with the Federal Reserve System’s Kevin Stiroh, concluded that climate-related risks can be captured in risk categories that are already used by financial institutions and reflected in the Basel Framework, for example credit risk, market risk, liquidity risk and operational risk. This is a key insight which saves us from inventing all kinds of new risk categories. The existing ones will do. However, the task force also concluded that we still need an enhanced toolbox that can better measure climate risks. This is why the ECB is encouraging banks to enhance both the quantity and the quality of their climaterelated disclosures, and to become more transparent about their overall exposures to climaterelated risks. Banks are still in the early stages of incorporating climate change into their risk frameworks; risk identification and risk limits around climate-related goals do not yet actually feature in their risk management processes. This needs to change. Euro area banks need to drastically improve their capacity to manage climate-related and environmental risks and start acknowledging how these risks can drive others, including credit, market, operational and liquidity risks. Crucially, we have no need to await regulatory developments before formulating our expectations for the management of climate-related risks.
The OECD1 estimates that global investments of USD 6.9 trillion every year are required until 2030. And that is just to keep us on track to limit global warming to 2 degrees Celsius above pre-industrial levels. Investment will need to be considerably higher than this USD 6.9 trillion figure if we are to live up to our commitment under the Paris Agreement of limiting the increase in global temperatures to 1.5 degrees. To put this number into perspective: we are talking somewhere around 8% percent of global GDP each year. Europe’s financial system is largely bank-based, so banks are playing a pivotal role in greening the economy. But what is the supervisor’s role in this process? The ECB aims to ensure the safety and soundness of the banks we supervise. Climate change creates material risks for banks, so it is our job to ensure that the banks under our supervision address these risks adequately and proactively. Regarding the risks emanating from climate change, our sole aim is to live up to our mandate. There is a knock-on effect of doing so, however, but it is a welcome one. By compelling banks to adequately assess and manage climate-related risks, we are, in effect, safeguarding the financing of the transition to a low-carbon economy as well. If banks proactively manage climaterelated risks, they will not be blindsided by stranded assets, meaning that capital will be preserved and can be used to finance investments in the low-carbon transformation.