Both acute and chronic climate events can create risks for financial stability. For example, insurance companies are directly exposed to acute climate events through various types of insurance policies that they provide to companies and households. As the likelihood of natural disasters and extreme weather increases, insurance companies’ costs are expected to rise. Internationally, there is a discussion on what measures are needed to deal with the fact that several insurance companies in some countries have stopped offering insurance for such damage, or that the price of the insurance is very high. This means that there is an insurance gap. If insurance covers climate-related damage to a significantly smaller extent, the chances of households and businesses recovering are reduced. This in turn can lead to increased credit risks for banks when the value of collateral for lending deteriorates. In Sweden, insurance protection against natural events is still high.

Transition risks can also give rise to stability risks. A measure leading to a higher price for carbon dioxide emissions or specific regulation for certain products or services may result in increased costs for companies and sectors that are particularly exposed to such decisions. The transition can also lead to some assets becoming unusable or completely losing value, so-called stranded assets. This means an increased risk of poorer profitability for these companies and thereby also increased credit risks for the banks. An orderly transition would strengthen the conditions for limiting such risks. If, on the other hand, the transition is too slow and measures to mitigate climate change are delayed or insufficient, climate risks will increase in the longer term. This can force a disorderly transition that can challenge financial stability and become even more risky.

The Riksbank and other authorities use various forms of climate stress tests and different types of sensitivity analyses to investigate the effects that climate-related risks may have on banks, and ultimately on financial stability. A Staff memo published by the Riksbank contains an analysis of how transition risks in the form of a cost for carbon emissions would affect banks' credit risks based on their loans to different sectors. Chart 3a shows aggregated emissions, measured as production-based emissions, from the companies to which Swedish banks have loans, grouped by sector, and chart 3b shows the volume of loans made to these companies.

The figure shows that Swedish banks have relatively small loans to companies with high direct emissions, while they have large loans to companies with low direct emissions. The analysis indicates that the transition risks for Swedish banks are low and manageable. However, it also shows that the profitability of companies that conduct carbon-intensive activities may be affected and that these will need to adapt their operations to be sustainable and profitable in the long term. However, the analysis is based on some simplifications and assumptions, for example, only direct emissions are estimated, which means that the risks are likely to be underestimated. For example, according to the analysis, the property sector has low direct emissions, but it has higher indirect emissions which are not captured in the analysis.

Million tonnes of carbon dioxide equivalents

SEK billion

A climate scenario analysis by the European supervisory authorities also shows that transition risks do not currently pose a risk to financial stability. At the same time, negative macroeconomic developments can increase the financial sector’s losses and thereby limit its ability to finance the climate transition. Even though the financial sector has the resilience to cope with negative scenarios, the analysis therefore shows that it is important to integrate climate-related risks into risk management.^[25] See Transition risk losses alone unlikely to threaten EU financial stability, “Fit-For-55” climate stress test shows. The European supervisory authorities the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), together with the European Central Bank (ECB) and the European Systemic Risk Board (ESRB).

The Riksbank is currently conducting several parallel research projects that deal with the consequences of physical risks for banks and their borrowers. In one project, data on all bank loans to companies in Sweden is used to investigate how weather events affect the banks’ requirements for collateral. Another project examines whether the risk of flooding affects profitability and capital levels in banks with mortgages to households in affected areas and whether the banks take a higher risk in their pricing. A third project uses data from the United States to investigate the availability of credit to companies after a natural disaster occurred and whether lending to affected companies influences employment in the area.^[26] See Research News 2024.