- Funding Programme
- Year
- 2021
Environmental Scenario Analysis and Climate Risk Assessment Practices in Austria and Romania
The Commission helped both the Financial Market Authority (FMA) of Austria and the National Bank of Romania (NBR) in building their capacity of identifying, measuring, modelling, and mitigating climate and environmental risks impacting the financial system’s stability.
Context
There is a need for central banks and financial market supervisors to monitor credit institutions’ exposure to non-financial companies that can be affected by climate risks, which can be either physical risks (floods, heat, drought, wildfires, etc.) or transition risks (to a low-carbon economy), as well as to mitigate the impact of climate risk on the financial system, while also evaluating the role of private financing in the transition to a green economy.
The green transformation is very costly and public funding will not be sufficient to foot the bill. Therefore, there is an urgent need to redirect private investment flows to sustainable projects. That is why there is a need to adequately manage risks of the financial sector exposure to be able to finance sustainably through enhanced skills and awareness of the supervised entities. These supervised entities will benefit from a cascading effect, which means that an increased supervisory expertise would translate into increased internal expertise in supervised entities.
Support delivered
This project assisted in identifying the level of environmental risks and subsequent prudential measures/instruments to enable the supervisors to assess potential risks to the financial system.
The objective was to support capacity building within the FMA and the NBR by providing them a monitoring framework, an overview of best practices (through the Network for Greening the Financial System (NGFS)’s, Banque de France’s and De Nederlandsche Bank’s expertise) and relevant data on environmental (including climate, pandemics and biodiversity) risks. In their role of supervisory institutions, the project aimed at supplying them with environmental scenarios, enabling them to measure risks and develop forward-looking solutions mitigating environmental / climate risks to foster a sustainable and resilient financial system.
Expected results
Better knowledge at the level of the FMA and NBR, both in the macro-prudential as well as in the micro-prudential fields, allow for a cross-sectoral, holistic approach. As a result of the project, both institutions are able to work with forward-looking scenarios to supervise the Austrian financial markets and the Romanian banking sector. The ultimate outcome will be the acquisition of methodological expertise by the FMA and the NBR on how such scenarios are structured so that they can be adapted for other risk types in their supervisory work.
More about the project
You can read the final reports here: