Heat, drought, forest fires, floods and flooding are increasingly endangering people and nature.

Climate change is thus also becoming a risk for financial stability.

For this reason, the European Central Bank (ECB) and the European Systemic Risk Council (ESRB) have dealt with the effects of climate change on the European financial sector.

In the report presented on Thursday they came to the conclusion that the burdens within Europe are very unevenly distributed.

The central bank and the risk watchdogs from the ESRB, which was set up as an early warning system after the financial crisis and is headed by ECB President Christine Lagarde, estimate the damage potential to be very high.

Markus Frühauf

Editor in business.

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    If different climate risks coincide, up to 30 percent of corporate loans can be affected.

    According to the report, the greatest environmental risk in the next two decades is damage from river floods.

    These physical hazards can be directly assigned to environmental or climate risks.

    The ECB and ESRB have identified a high concentration of risk here: around 70 percent of the risks to companies with high or increasing physical threats are on the books of 25 banks.

    High CO2 risks

    In addition, there are transition risks such as a significant increase in the price of CO2 or revaluations of shares and corporate bonds.

    Here in particular, the ECB and ESRB note an uneven distribution of climate risks in the financial sector.

    The reason for this is the extensive involvement of investment funds in companies with high CO2 emissions.

    These made up 55 percent of the plants, of which only 1 percent comply with the EU climate rules, the so-called taxonomy.

    While the direct climate risks of the insurers seem manageable, they increase noticeably through their investments in fund companies.

    The positions on companies with high emissions account for 14 percent on European bank balance sheets, according to the report.

    The sectors include manufacturing, electricity, transportation and construction.

    In its annual report, the ESRB draws attention to the high risk posed by rising US government bond yields, which reflect growing concerns about inflation. Higher borrowing costs for European countries and companies can slow down the economic recovery. Then financing would also become more expensive for the euro countries, which can pose challenges for highly indebted countries such as Italy or Greece. The ESRB is also concerned that financial companies outside the banks, mainly asset managers, are taking on more and more risks due to extremely low interest rates, as shown by declining risk premiums for bonds from financially weak companies. In addition, investments in assets that are not very liquid and cannot be sold immediately on the markets have increased.This makes fund companies vulnerable when investors want to withdraw funds.

    For the systemic risk council, sudden price corrections pose a danger, which is due to the overvaluations in some market segments.

    The corporate debt, which rose during the Corona crisis, is not sufficiently taken into account.

    In her speech to the European Parliament on Thursday, Lagarde pointed out uncertainties due to the virus mutations.

    However, because of the vaccination progress, the worst economic scenarios have become less likely.

    For the banks, she promised an end to dividend restrictions in September.

    The prerequisite is that the conditions do not deteriorate significantly.

    A wave of bankruptcies with many loan defaults could thwart this bill.