Paul Murphy (Dublin South West, RISE)
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77. To ask the Minister for Finance if there has been any progress on the commitment in the Programme for Government to develop new stress tests for financial institutions to look at the impact of tangible risks of higher temperature scenarios and involvement with the fossil-fuel economy on their portfolios, as recommended by the Taskforce on Climate Financial Disclosures. [28543/24]

Jack Chambers (Dublin West, Fianna Fail)
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I should say that as competent authority, the European Central Bank (ECB) is required to carry out annual stress tests on Significant Supervised Institutions (SSI), which includes Bank of Ireland and AIB, in the context of its Supervisory Review and Evaluation Process (SREP) as set out in Article 100 of the Capital Requirements Directive IV (CRD IV).

Supervisory Review and Evaluation Process (SREP) Results 2023

The 2023 Supervisory Review and Evaluation Process (SREP) for banks supervised by the ECB, took place during a period of uncertainty about both the economic outlook and the dynamics in financial markets. Along with capital adequacy and liquidity and funding risk, the SREP also scores a number of other key areas including business model, internal governance, credit risk, operational risk and climate and environmental (C&E) risk.

C&E risks are key for the economy and the financial sector. ECB Banking Supervision has stepped up its efforts to ensure that banks adequately identify, assess and manage C&E risks, while transparently disclosing the risks they are exposed to. C&E risks are being incorporated in the regular supervisory cycle and treated in the same way as any other material risk.

The results of the 2023 EU-wide stress test show that the banking sector would be able to withstand a severe economic downturn, as captured in the harshest adverse stress test scenario applied since the start of European banking supervision. ECB Banking Supervision will continue with its focused efforts to promote prudent behaviour and proactive risk management, ensuring that banks remain resilient and continue supporting the real economy during challenging times.

Capital Requirements Directive VI/ Environmental, Social and Governance Risk.

Under the EU Capital Requirements Regulation (CRR) III/ Capital Requirements Directive (CRD) VI, which come into effect in January 2025 and January 2026 respectively, institutions will have to include Environmental, Social and Governance (ESG) risk, including climate related considerations in their prudential framework. These measures should to be consistent with the sustainability commitments institutions undertake under other pieces of Union law, such as the Corporate Sustainability Reporting Directive (CSRD).

Institution supervisors will oversee how institutions handle ESG risks and include ESG considerations in the context of the annual SREP. Stress testing of those risks should start with climate and environment-related factors, and as more ESG risk data and methodologies become available to support the development of additional tools to assess their quantitative impact on financial risks, competent authorities should increasingly assess the impact of those risks in their adequacy assessments of institutions.

I am advised by the Central Bank that Ireland has been included in a number of other stress testing exercises as follows;

2022 supervisory climate risk stress test

The stress test exercise was the first exploratory supervisory stress test carried out by the ECB driven by specific data collection from banks aimed at creating awareness on climate risk among supervised entities as well as understand the banking sector’s resilience to the materialisation of climate-related risks. This is available at .

2022 FSAP climate risk stress test

In 2022 the IMF conducted a stress test of the banking sector including climate stress tests. The banking analysis used scenario-based stress test to assess the resilience of retail and large international banks, while applying a streamlined sensitivity test on other international banks, which are all Less Significant Institutions (LSI). This is available at: .

Irish banks are also part of 2024/2025 “One-off Fit-for-55 climate risk scenario analysis”

The European Commission invited the ESAs (EBA, ESMA and EIOPA), the ECB and the ESRB to conduct a one-off Fit-for-55 climate risk exercise aimed at gaining insights into the capacity of the financial system to support the transition to a lower carbon economy even under conditions of stress, expressed as impacts on credit losses and market valuations. Banking sector and cross sectoral quantitative analysis will be carried out between Apr- Sept 2024 followed by drafting of final report. The results will be published in Jan 2025.

• The analysis will be based on three ad-hoc climate scenarios developed by the European systemic risk board:
• Baseline scenario - Fit for 55 package (referred to as “the package” going forward) is implemented as planned under a baseline macroeconomic environment;
• Adverse scenario - the package is implemented as planned under a baseline macroeconomic environment, but with the incorporation of additional climate risk downside factors due to sudden reassessment of transition and physical risk;
• Second adverse scenario - the package is implemented as planned but in an adverse economic environment (consistent with adverse scenarios for regular stress testing exercises) as well as additional climate risk downside factors due to sudden reassessment of transition and physical risk

• Working with Network for Greening the Financial System (a network of Central Banks and Financial Supervisors that aim to accelerate the scaling up of green finance and develop recommendations for Central Banks’ role for climate change) on scenarios within the Bank’s stress macro-modelling framework.
• Work on the banking sector’s exposure to climate risks.
• Work on household transition risk and their capacity to decarbonise.