Climate change or green transition: impact on corporate costs

As the ECB stated the last Wednesday, the costs that will be incurred for climate change in the medium/long term will by far exceed the short-term costs to be incurred for the green transition.

In a time when all major economists, the largest banking institutions and the largest financial services firms are basing their investment strategies on the assumption that the inflation rate will reach 6% in the coming months, the European Central Bank, last Wednesday, has even mentioned a minus 10% of GDP and a 30% increase in the defaults of the most exposed companies.

As pointed out by the FT, the ECB highlighted the fact that the costs of climate change could lead to huge negative consequences on all companies, banks, and in general European and non-European economies.

In particular, the Central Bank would have come to this conclusion following a study based on “stress tests” applied to more than 4 million companies and 1600 European bank, considering a time horizon of 30 years.  The results reported at the beginning of the article (-10% in GDP and +30% in corporate defaults) refer to the worst possible hypothesis, i.e., in case no action is taken to stop global warming. In the analysis conducted by the Bank, significant weight was given to the fires in southern Europe, which in recent summer months have already put a strain on many companies, causing enormous physical damage, and the ECB stressed that, if decisions are not taken in time, these figures can only increase more than proportionally in the coming times. 

In recent months, in fact, many sectors have been brought to their knees by the fires, especially during the summer period. In particular, the primary sector has been greatly affected, and the competent government authorities have moved in time to provide economic support to some of the companies affected, but this aid is not sustainable in the long run, have stressed the governments of many European countries, and that it is necessary to find a solution to solve, or at least, mitigate the problem and its enormous consequences. In fact, in addition to all the environmental damage, it has been shown that banks, in the worst affected countries, are far more exposed to default than their counterparts.

As a future strategic action, the ECB will use the data procured from the study mentioned in the previous lines as a basis for conducting further stress tests to assess the exposure of individual Eurozone banks to climate risks next year, which will feed into their capital requirements, and the ECB also plans to change its exposure to climate risks in the large portfolio of bonds and guarantees it has built up in recent years.

And you, what do you think? Do you think the short-term costs of supporting the green transition are lower than the medium- to long-term costs of climate change?

Author: Alberto Fabiani

RELATED

Climate change or green transition: impact on corporate costs

As the ECB stated the last Wednesday, the costs that will be incurred for climate change in the medium/long term will by far exceed the short-term costs to be incurred for the green transition.

In a time when all major economists, the largest banking institutions and the largest financial services firms are basing their investment strategies on the assumption that the inflation rate will reach 6% in the coming months, the European Central Bank, last Wednesday, has even mentioned a minus 10% of GDP and a 30% increase in the defaults of the most exposed companies.

As pointed out by the FT, the ECB highlighted the fact that the costs of climate change could lead to huge negative consequences on all companies, banks, and in general European and non-European economies.

In particular, the Central Bank would have come to this conclusion following a study based on “stress tests” applied to more than 4 million companies and 1600 European bank, considering a time horizon of 30 years.  The results reported at the beginning of the article (-10% in GDP and +30% in corporate defaults) refer to the worst possible hypothesis, i.e., in case no action is taken to stop global warming. In the analysis conducted by the Bank, significant weight was given to the fires in southern Europe, which in recent summer months have already put a strain on many companies, causing enormous physical damage, and the ECB stressed that, if decisions are not taken in time, these figures can only increase more than proportionally in the coming times. 

In recent months, in fact, many sectors have been brought to their knees by the fires, especially during the summer period. In particular, the primary sector has been greatly affected, and the competent government authorities have moved in time to provide economic support to some of the companies affected, but this aid is not sustainable in the long run, have stressed the governments of many European countries, and that it is necessary to find a solution to solve, or at least, mitigate the problem and its enormous consequences. In fact, in addition to all the environmental damage, it has been shown that banks, in the worst affected countries, are far more exposed to default than their counterparts.

As a future strategic action, the ECB will use the data procured from the study mentioned in the previous lines as a basis for conducting further stress tests to assess the exposure of individual Eurozone banks to climate risks next year, which will feed into their capital requirements, and the ECB also plans to change its exposure to climate risks in the large portfolio of bonds and guarantees it has built up in recent years.

And you, what do you think? Do you think the short-term costs of supporting the green transition are lower than the medium- to long-term costs of climate change?

Author: Alberto Fabiani

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