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The ECB has published new climate risk indicators for finance

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The new climate risk indicators published by the ECB are useful statistical tools to address the lack of systematic climate data for the financial sector; they are divided into analytical and experimental and show a growing trend in “green” debt securities in the euro area.

From the European Central Bank comes the specification: these are useful tools that can be improved over time, both by the interventions of the ECB itself and by the national central banks.

We need a better understanding of how climate change will affect the financial sector and vice versa. For this, the development of high-quality data is crucial“, says Isabel Schnabel, a member of the Executive Board. “Indicators are a first step to help narrow the climate data gap, which is crucial to making further progress towards a climate-neutral economy.”

The ECB’s new climate risk indicators

The publication of climate risk indicators is part of the ECB’s commitment to the ecological transition: in July 2022, the Central Bank published its climate action plan, whereas in October it began to withdraw its participation in corporate bonds deemed most dangerous to the climate.

The new climate risk indicators are distinguished into experimental and analytical: the former meet most of the quality requirements of ECB statistics, while the latter is of lower quality, subject to a number of limitations. The European Central Bank in fact recommends cautious use of these tools that are still in the process of improvement and, at the moment, more than giving certain and irrefutable information, can be a useful starting point for comparison on their perfectibility within the statistical and research community, to better understand how and what data to acquire on climate.

The indicators – reported by the Community Institute – will in the meantime be improved in the method and sources used by both the ECB and the national central banks, which will enrich them with new data on climate risks in line with European indications and provisions. Moreover, for the indicators to be accessible and replicable, whenever possible they use data already existing in the European System of Central Banks (ESCB) or in any case public data.

Experimental and analytical climate risk indicators

The experimental indicators target finance that wants to be sustainable towards debt instruments in the euro area deemed appropriate. Data currently available indicate that green bonds in the eurozone have more than doubled in the last two years, and even more dramatic growth has affected the global bond market. While they are a tool for increasing transparency on financial instruments, climate risk indicators are also a useful indicator of the state of the art of the transition to a zero-emission economy, but given that there is no international standard of what “green” or “sustainable” in investments, the data provided are to be used with pliers.

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The analytical indicators concern, on the one hand, climate-altering emissions and, on the other hand, risks linked to extreme weather events. The emission indicators shall include information on carbon density in securities and loan portfolios within financial institutions and on how the sector is exposed to carbon-intensive markets: From the preliminary data collected, we know that, in the Eurozone, most of the issues related to the world of finance are held by investment funds, but also that much of the financing of the most polluting activities comes from banks.

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