One-off Fit-for-55 climate scenario analysis (2024)
One-off exercise run by the EBA, EIOPA and ESMA with the ECB and the ESRB at the Commission's request, which measured in November 2024 how the Fit for 55 transition would hit the EU's banks, insurers, pension funds and investment funds.
The Fit for 55 package is the body of legislation through which the EU aims to cut net emissions by at least 55% by 2030 compared with 1990. The Commission asked the European supervisory authorities to measure what that transition would do to the financial system. The one-off exercise that followed was run by the EBA, EIOPA and ESMA, with the ECB and the ESRB, and its results came out on November 19, 2024. It differs from sector stress tests in scope: one set of scenarios applied to 110 banks, 2,331 insurers, 629 occupational retirement institutions and about 22,000 EU-domiciled funds. It covers loans to non-financial corporations, equities, bonds, sovereign debt included, and fund holdings. The horizon is eight years, out to 2030. There are three scenarios. The baseline assumes the package is implemented in the economy of the ESCB's June 2023 projections, with the cost of the transition on top. The first adverse scenario adds a run-on-brown: investors dump the assets of carbon-intensive companies, which lose access to the funding for their own decarbonization. The second layers standard macro-financial shocks on top. In the first, first-round losses stay between 5.2% and 6.7% of starting exposures depending on the sector; second-round losses, driven by chain selling, fall mainly on funds, at 11.2%. In the second, first-round losses range from 10.9% to 21.5% depending on the sector. The official conclusion: transition risk alone does not threaten financial stability, but combined with a macroeconomic shock it can. The exercise sets no prudential requirement, micro or macro. An insurer sees itself there in the same chain as the funds it holds, which sell at the same moment it does.
Textbook case: an insurer holds 10,000 million euros of investments, including 600 million of equities in carbon-intensive companies, 1,500 million of bonds from the same issuers and 4,000 million of sovereign debt. In a run-on-brown, it applies shocks of −35%, −6% and −2%. The first-round loss is 600 × 35% + 1,500 × 6% + 4,000 × 2% = 210 + 90 + 80 = 380 million, or 380 / 10,000 = 3.8% of the portfolio. It also holds 1,000 million of fund units, which must sell to meet redemptions and lose 11% in the second round: 110 million more. The total reaches 490 million, or 4.9%. Liabilities, discounted at higher rates in a macroeconomic shock, would absorb part of the hit to own funds.
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