ECB’s Schnabel: Prudential Supervision Must Take Into Account Climate Risks

5 September 2023

By Mariana Somensi – NICOSIA (Econostream) - Climate-related and environmental risks (C&E risks) significantly increase financial risks and therefore warrant being taken into account by prudential supervision, ECB Executive Board member Isabel Schnabel said on Tuesday.

In a speech at a legal conference organised by the ECB, Schnabel said, ‘In the EU, only a quarter of losses caused by climate-related catastrophes are insured, giving rise to additional risks to the macroeconomy, financial stability and public finances.’

In addition to the physical climate risks, the financial sector is susceptible to transition risks resulting from global policy changes in response to climate change, she said. Climate-related predictions are subject to non-linearities, she said, making planning difficult.

Another relevant characteristic of C&E risks is their potential irreversibility, making timely action crucial to mitigate global warming and environmental decline, she said.

Schnabel observed that an orderly climate transition is achievable with early, decisive measures, preventing sudden asset repricing and allowing financial intermediaries to gradually adjust their investments and prepare for potential losses.

However, she said, ‘the data available and the knowledge we have about them remain limited’, and economic models of climate change, operating in historically uncharted waters, may be prone to underestimating the impact of developments.

‘In view of the existing data and knowledge gaps, it is very likely that climate-related and environmental risks are currently underpriced’, as ‘most banks under European banking supervision insufficiently consider climate-related risks in their credit assessments’, she said.