EU is pondering financial stress tests dealing with climate risks

The European Union financial services chief said on Wednesday that the European Commission is considering stress tests and other measures to force financial firms to raise their buffers against the risks posed by the climate crisis.

The move would represent a major change in the bloc’s climate policy, which has so far focused on encouraging firms to adopt greener policies voluntarily.

Valdis Dombrovskis, the vice president-designate who also serves as the Commissioner for Financial Stability, Financial Services and Capital Markets Union, said the EU executive commission will explore ways to improve financial firms’ management of climate and environmental risks to increase their defences against natural disasters and other possible financial losses caused by global warming.

“That will mean assessing whether we need to make any regulatory changes to ensure better reporting and monitoring of climate-related risks,” Dombrovskis said.

He added that the new commission, which is expected to take office in December, will also look into ways “to integrate sustainability risks into financial stability monitoring and supervision mechanisms, like stress testing and scenario analysis”.

This higher scrutiny could force insurers and other financial firms to insulate themselves further against climate risks.

The move would be part of a wider strategy to help the transition to a greener economy.

New EU rules on disclosing the climate impact of asset managers’ investing strategies have been recently agreed upon, and will kick in from 2021 onwards.

EU standards on what is considered a responsible investment – or a green bond – are under negotiation. The bloc is considering phasing out funding for fossil fuel projects by its top financial arm, the European Investment Bank.

Dombrovskis, who has been the EU finance chief for the past five years and has had his mandate renewed, said the commission would also explore standards and labels for green mortgages and loans to help owners upgrade their houses.

Buildings are responsible for a big chunk of carbon emissions, and three-quarters of them in the 28-country bloc are energy inefficient, according to EU data.