European Supervisory Authorities and European Central Bank Publishes Results of "Fit-For-55" Climate Stress Test

The European Supervisory Authorities (European Securities and Markets Authority, European Banking Authority, and European Insurance and Occupational Pensions Authority) and the European Central Bank have published the results of the one-off "Fit-For-55" climate scenario analysis. The EU's Fit-for-55 package aims to stimulate investment and innovation in the transition to a green economy and plays a crucial role in the EU's goal to achieve an emissions' reduction of 55% by 2030 and climate neutrality by 2050.

The climate stress test was conducted against three scenarios developed by the European Systemic Risk Board, with the support of the ECB. The scenarios incorporate transition risks as well as macroeconomic factors, under the assumption that the Fit-for-55 package is implemented as planned. Under the scenarios examined, transition risks alone are unlikely to threaten financial stability. However, when transition risks are combined with macroeconomic shocks, they can increase losses for financial institutions and may lead to disruptions. The report therefore calls for a coordinated policy approach to financing the green transition and the need for financial institutions to integrate climate risks into their risk management in a comprehensive and timely manner. The report notes that given the novelty of the methodological approaches and the data-related challenges, the results are subject to a large margin of uncertainty.

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