A European Central Bank (ECB) stress test of the economic risks from climate change has found that Irish firms are among the least exposed in the euro area to high physical risks, including flooding, sea level rises and wildfires.
However, they fare in the middle of the pack among euro zone companies in terms of so-called transition risks – the cost of policies aimed at reducing carbon dioxide emissions.
A chart in the report, published this week, points to about 3 per cent of Irish companies being exposed to high physical climate risks, among the lowest in the single currency area. By comparison, the percentage of companies in southern Europe with high risk exposures range from over 25 per cent in the case of Italy to more than 95 per cent of Greek firms.
About a third of Irish firms are exposed to high transition risks, according to the chart.
About 40 per cent of Irish-based lenders’ loan portfolios are exposed to either high or very high emitters, compared to a euro area average of about 45 per cent. However, more than half of the loans are in wholesale banks based in the Republic, rather than domestic lenders.
The ECB exercise tested the impact of climate change on more than four million firms worldwide and 1,600 euro area banks under three different climate policy scenarios. These comprised an orderly transition to a greener economy, a disorderly transition where action is delayed and introduced in an abrupt way, and a “hot house” scenario where no regulations or policies are introduced to limit climate change, leading to extremely high physical risks.
Under these latter circumstances, global warming would not remain limited, and global temperatures would rise by at least three degrees Celsius above pre-industrial levels until 2100.
Portfolios most vulnerable to climate risk are 30 per cent more likely to default in 2050 compared with 2020 under the hot house world scenario, the ECB said.
The most emission-intense sector is mining, followed by electricity and gas and agriculture. On the other hand, the biggest contributors to overall absolute emissions are manufacturing, electricity and gas, as well as transport and wholesale and retail activities, it said.
While there is a long tail to the risks facing loan portfolios, Goodbody Stockbrokers analyst Eamonn Hughes said the ECB’s increased focus on climate change may ultimately lead to regulators considering the imposition in the medium term of capital reserve demands on banks that have high exposures climate risks.
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