Following the adoption of the Paris Agreement on climate change1 and the UN 2030 Agenda for Sustainable Development in 2015, governments are making strides to transition to low-carbon and more circular economies on a global scale. On the European front, the European Green Deal sets out the objective of making Europe the first climate-neutral continent by 2050. The financial sector is expected to play a key role in this respect, as enshrined in the Commission action plan on financing sustainable growth.
Transitioning to a low-carbon and more circular economy entails both risks and opportunities for the economy and financial institutions,2 while physical damage caused by climate change and environmental degradation can have a significant impact on the real economy and the financial system. For the second year in a row, the European Central Bank (ECB) has identified climate-related risks as a key risk driver in the SSM Risk Map for the euro area banking system. The ECB is of the view that institutions should take a strategic, forward-looking and comprehensive approach to considering climate-related and environmental risks.