EU climate stress test shows transition risks unlikely to threaten financial stability

The European Central Bank and European Supervisory Authorities released a climate stress test today. It found that transition risks alone are unlikely to threaten EU financial stability. However, combining these risks with macroeconomic shocks could increase losses for financial institutions. The stress test examined three scenarios related to the EU's Fit-for-55 climate package. The results showed that first-round losses from transition risks range from 5.2% to 6.7% across sectors. In adverse scenarios, losses could rise significantly, particularly for investment funds. Despite potential losses, the impact on financial institutions' capital is expected to be mitigated by various factors. The findings aim to help policymakers ensure adequate financial resources for the green transition while managing risks in the financial system.