As we have seen in the pandemic, a common shock can have asymmetric impacts on countries which have a high concentration of certain sectors, such as tourism. Perhaps more importantly from a financial integration perspective, interconnectedness through supply chains matters. Take manufacturing, which accounts for around 20% of banks’ loan portfolios. While the reported direct emissions of these companies are comparatively lower, indirect exposures through the supply chain are more substantial. The physical risks of climate change have a clearer geographic angle and differ in their regional impact. These risks are also expected to increase in the coming decades, with some likely to be concentrated in particular geographical areas. Floods are the most significant hazard in central and northern Europe, for example, while heatwaves, droughts and wildfires represent the greatest risks in southern Europe. Taken together, around 30% of the credit exposures of euro area banks are to businesses with high or increasing exposure to at least one source of physical risk. Ultimately, the impact of climate change on financial stability depends on the degree of concentration of exposures, and what mitigation measures are in place. Both fronts give cause for concern. Over 70% of identified physical risk exposures in the euro area are held by just 25 banks. There is also a notable concentration by country (Chart 2, left panel), suggesting that physical risk could become a prominent source of asymmetric shocks. Moreover, the physical collateral backing loans may itself be damaged by the event, exacerbating the risk to banks.

For a more detailed discussion, see Cimadomo, J. Hauptmeier, S., Palazzo, A.A. and Popov, A. (2018), “Risk sharing in the euro area”, Economic Bulletin, Issue 3, ECB. 2. Draghi, M. (2018), “Risk-reducing and risk-sharing in our Monetary Union”, speech at the European University Institute, Florence, 11 May. 3. More details on financial integration, including the latest data, can be found on the ECB’s website. 4. Some caution is necessary when interpreting these movements at present, given the potential impact of Brexit on measurement. 5. The findings of the ECB’s ongoing quantitative assessment of climate-related risks are discussed in more detail in Alogoskoufis, S. et al. (2021), “Climate-related risks to financial stability”, Financial Stability Review, ECB, May. 6. More details on the findings to date of the joint workstream of the ECB and the European Insurance and Occupational Pensions Authority (EIOPA) on the insurance protection gap will be published in EIOPA’s forthcoming June Financial Stability Report. 7. These are funds that select assets based on environmental, social and governance criteria. 8. De Haas, R. and Popov, A. (2019), “Finance and decarbonisation: why equity markets do it better”, Research Bulletin, No 64, ECB, 27 November; De Haas, R. and Popov, A. (2019), “Finance and carbon emissions,” Working Paper Series, No 2318, ECB, September. 9. Lagarde, C. (2021), “Towards a green capital markets union for Europe”, speech at the European Commission’s high-level conference on the proposal for a Corporate Sustainability Reporting Directive, 6 May.