By the ECB/ESRB Project Team on climate risk monitoring
As work on laying the analytical foundations for measuring climate-related financial risk
matures, there is a need to better gauge its implications for systemic risk, and associated
scope for a macroprudential policy response. Previous assessments of climate-related risks to
financial stability for the European Union have highlighted granularity and heterogeneity of the
impacts stemming from both adverse physical shocks and transition dynamics.1 Beyond the related
concentration risk, they have also demonstrated strong path dependence in climate-related risk,
whereby any costs of timely upfront action are more than offset by future risk benefits in terms of
reduction. At the same time, a maturing body of work has also highlighted analytical gaps relevant
for systemic risk, notably in terms of scope (interaction with financial vulnerability and economic
feedback), scale (interconnectedness and contagion between financial sectors) and horizon (how
long dated shocks could translate into short-term financial stress, alongside a more in-depth
modelling of dynamic behaviours). Notwithstanding these gaps, a growing body of empirical
evidence on climate-related risks to financial stability has now provided a robust analytical
foundation for macroprudential policy considerations, spanning both the cross-sectional and time
series dimensions of systemic risk.