Euro-Area Physical Risk Indicators for Climate-Related Financial Stability Analyses

Climate-related physical risks can affect financial stability at a global level. Developing harmonized and comparable indicators is crucial for accurately assessing the potential risks that climate change-driven natural disasters pose to financial markets. These metrics evaluate the exposure of financial institutions’ loans and securities portfolios covering a wide range of hazards, assuming different scenarios and incorporating various factors such as collateral, loans’ maturity and flood defences. Exploiting the ECB physical risk indicators, this paper describes the key results for Italy as compared with the main euro-area countries. The results indicate that the risks to financial portfolios are expected to increase, especially under the pessimistic climate scenario, in Italy as well as in the rest of the euro area. The findings underscore the importance of adopting climate adaptation measures and incorporating climate risks into portfolio management, in order to reduce future losses and ensure the resilience of the financial system.