In the case of the short-term transition risk projection based on a frontloaded Disorderly transition scenario between 2021 and 2024, the cumulative impairments increased by 0.73% compared to the base scenario, mostly driven by the most carbon-intensive sectors having an impact of more than 2%. Due to the overall benign features of the frontloaded Disorderly transition scenario, the impact on loss figures remained low. Corporate exposures not secured by real estate drove the impairment losses, but also exposures secured by real estate with bad EPCs happened to be more prone to credit losses.
In terms of market risk, only a small reduction in the net fair value of trading portfolios was projected. It should be noted that this was only the one-year materialisation of a transition shock in 2022, and given the absence of volatility shocks and due to the simplified market risk methodology, the scenario was very benign and not comparable to the usual EBA stress test assumptions. Given the negligible impact on the net fair value of trading portfolios, it can be concluded that climate risk is not yet integrated into stress testing models for market risk.
1. Drought and heat risk
The transmission channel for drought and heat risk impacted the profitability of firms through a decrease in productivity, mainly affecting sectors with outdoor activities such as agriculture, mining and construction. But apart from the sectoral decomposition, the geographical location of counterparties is also important, albeit on a less granular level (country break-down) than for flood risk. It should be stressed that risk mitigants such as insurance coverage and disaster relief schemes were not taken into account by most of the banks.
2. Flood risk
Flood risk impacted the real estate collaterals, leading to higher loan-to-value (LTV) ratios and, therefore an increase in LGD and expected loss for loans secured by real estate. The results, however, presented a lack of differentiation between the impact on LTV ratios and different flood risk zones. High and medium flood risk zones accounted for more than half of the losses, but only 31% of exposures. And similar to drought and heat risk, the banks rarely included mitigants such as insurance coverage in the calculations.