EU Financial Regulators Testing Climate Transition Resilience

The European Commission has asked the three European Supervisory Authorities (ESAs) to conduct a one-off analysis of the financial system’s resilience as EU member states decarbonise their economies in line with the bloc’s 2030 net zero targets. “This one-off exercise should go beyond the usual climate stress tests, as a cross-sectoral exercise looking also at contagion and second-round effects, thereby giving us a better understanding of the vulnerabilities in the financial system,” the Commission said. “As part of this work, we would also appreciate any insights into the financial system’s capacity to support green investments under stress.” The ESAs will be expected to develop “severe but plausible scenarios” that could affect the financial system as a whole between now and 2030. One of these scenarios should focus on climate-related risks that could materialise in the near-term in the form of asset price corrections triggered by a sudden reassessment of a physical or transition risk. A second scenario should combine these climate-related risks with other stress factors, the Commission said. The analyses will be conducted jointly by the ESAs with the European Central Bank and European Systemic Risk Board, with the results of these findings expected to be submitted no later than Q1 2025.  

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