Companies and banks that adopt green policies early "clearly benefit," compared with the cost of unchecked climate change later, according to a European Central Bank stress test released Wednesday.
The economywide climate stress test looked at the impact of climate change on more than 4 million firms worldwide and 1,600 European banks under three different climate policy scenarios, and found that taking steps now to help transition to a zero-carbon economy provide an advantage over both physical and transition risks.
The ECB exercise also found that firms located in regions most exposed to physical risk could face very severe and frequent natural disasters that would also affect their creditworthiness.
The ECB will conduct a related stress test on climate change next year.
The current stress test relied on data, assumptions and models developed by the ECB's staff from counterparty-level climate and financial information collected for millions of companies to which European banks are exposed via loans and securities holdings.
"The results of the analysis show that the short-term costs of a green transition pale in comparison to the costs of unfettered climate change in the medium to long term," said Frank Elderson, ECB executive board member, in a banking conference speech Thursday in Frankfurt. "The costs of a transition are always more than compensated by long-term benefits in terms of investing in sustainable technologies."
The ECB stress test showed that climate-related and environmental risk effects will increase moderately until 2050 if not mitigated, with "potentially severe" losses for banks by then, Mr. Elderson said.