2024 marked the first year in which the average global temperature was 1.5°C above pre-industrial levels. 1 Under the Paris Agreement, this threshold should not be exceeded on a sustained basis. The warming of the atmosphere, the soil and the oceans is caused by the growing concentration of GHG in the atmosphere. This mainly stems from the burning of fossil fuels such as oil, gas and coal, as well as from agriculture. The effects are being felt around the world. Acute risks are increasing due to more frequent and more severe heat waves, droughts, forest fires and floods, which can cause considerable damage to our health and to the economy. But the materialisation of chronic risks, such as rising sea levels, also constitutes a growing threat. In addition, climate change and nature and biodiversity loss are mutually reinforcing.
All of these developments are increasingly giving rise to risks to the economic and financial system, as shown, for example, by an NGFS analysis. 2 According to this analysis, the current level of ambition of climate policy leads to climate change that would result in global economic output being more than 15 % lower by 2050 than in a hypothetical scenario with no climate change.
At the same time, the necessary transition to a net zero and more sustainable economy requires structural and long-term changes, which may also entail considerable financial risks for the real economy and financial sector.
Economic and environmental challenges are closely intertwined. Extreme weather events and nature and biodiversity loss may make food, resources and raw materials more scarce. 3 Already, they are pushing up food prices, as demonstrated in a joint study by the Potsdam Institute for Climate Impact Research (PIK) and the ECB. 4 Monetary policy transmission channels may also be impaired. For example, climate change might lead to productivity losses or the destruction of assets, which in turn would affect the saving and investment behaviour of households and firms. 5 Furthermore, climate change entails systemic risks that could jeopardise the stability of the financial system. This kind of scenario could occur, for instance, if a large number of financial market participants were affected by extreme weather events or changes in the regulatory framework. 6 Last but not least, these climate-related risks can have an impact on the value and risk profile of assets on bank balance sheets as well. This is equally true for the Bundesbank’s balance sheet.
Transparency and data availability in climate matters are crucial to identifying and managing financial climate-related risks. To make well-founded investment decisions and allocate capital in the most (risk) efficient way possible, it is vital that emissions are measurable and traceable. Transparency and reliable data thus form the bedrock for the transition to a net zero economy. The Eurosystem – and hence also the Bundesbank – has long been committed to promoting climate-related transparency in the economic and financial system. In 2021, it had already agreed on a common framework to make non-monetary policy portfolios more sustainable and increase its own climate-related transparency.
The Bundesbank’s fourth annual climate-related disclosures for the first time also include GHG metrics on the Bundesbank’s shares in the Eurosystem’s monetary policy holdings of corporate and covered bonds. These had previously been reported solely by the ECB on behalf of the Eurosystem as a whole. In addition, the report highlights new strategic and thematic developments within the Bundesbank related to green finance.
