Climate risk indicator package released
The European Central Bank (ECB), in collaboration with experts from national central banks has updated its climate change-related indicators for the financial sector by publishing Volume No. 48 of its Statistics Paper Series on ‘Climate change-related statistical indicators’.
These indicators provide systemic insights into how financial markets are addressing the green transition and how financial institutions might be affected by climate change. The first indicators were released about a year ago.
The Climate Risk Indicator package, provides key indicators to track Physical and Transition risks of Climate Change. This comprehensive documentation spans over 160 pages and includes downloadable historical and forward-looking values of these indicators. Despite some watering down, ECB remains committed to further developing this initiative. Notable indicators include:
- Transition Risk: The Financial Emissions (FE) indicator tracks carbon emissions from non-financial corporations (NFCs) financed by financial institutions. Meanwhile, the Weighted Average Carbon Intensity (WACI) calculates a debtor/issuer’s greenhouse gas emissions relative to their total revenue and the creditor’s investment portfolio.
- Physical Risk: The Physical Exposure at Risk (PEAR) indicator assesses the prevalence of natural phenomena, while the Normalized Exposure at Risk (NEAR) measures potential losses financial institutions may incur following natural events damaging physical assets. Additionally, the Collateral-adjusted Exposure at Risk (CEAR) estimates expected losses within a bank’s portfolio, factoring in collateral pledged with a loan commitment.
This initiative underscores ECB’s commitment to integrating climate risk considerations into financial supervision and policy-making, serving as a valuable resource for stakeholders navigating the complexities of climate-related risks and opportunities.
Climate change-related indicators
By way of background, this is what the ECB shares on their website.
We are committed to improving the quality and availability of climate data, because the more we know about the climate crisis, the better we can identify and manage its risks and opportunities. This is why the ECB and the national central banks of all EU Member States have together started developing statistical indicators – harmonised at the euro area level – for climate-related analysis.
These indicators will help us to more effectively analyse climate risks that can affect monetary policy, price stability and the financial system. They will also help us to better understand the challenges and opportunities we face as we transition to a greener economy. Better and more accessible statistics can also enhance transparency on climate-related matters.
The indicators were published for the first time in January 2023. A version with additional breakdowns of the indicators on ”sustainable finance” was released in November 2023. The “carbon emissions” and “physical risks” indicators were updated with significant methodological improvements and additional details in April 2024. Producing these indicators is complex and they are still subject to limitations. These limitations mean that, at this stage, the data are published as experimental statistics or analytical indicators and should be analysed with due care.
These indicators are part of our broader climate action plan. They are a work in progress. Plans are in place to update them based on an improved methodology and additional data sources.
April 16, 2024
