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MALTATODAY 26 September 2021

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5 maltatoday | SUNDAY • 26 SEPTEMBER 2021 NEWS NICOLE MEILAK MALTESE banks are among the most exposed in Europe to firms subject to high physical climate-related risks, including flooding and wildfires. An economy-wide climate stress test report by the Euro- pean Central Bank (ECB) high- lighted that southern European countries, including Malta, are more exposed to firms that are subject to high physical risks as- sociated with climate change. Climate risk affects banks mainly through their loan expo- sures to firms which are subject to increased physical and tran- sition risks. For Maltese banks, roughly 75% of loans are lent to domestic firms, and in turn, do- mestic risk. The risk drivers are categorised as transition risks and physical risk. Carbon costs, demand for goods, and technological change and energy efficiency fall under transition risk. Physical risk is based on damaged to physical capital arising from climate-re- lated natural catastrophes, and potentially disruptive effects for firms' production. With regards to transition risks, loans from Maltese banks tend to be diversified across high and low emitters. However, the abso- lute majority of domestic bank loans are exposed to high phys- ical risk, at around 54% of bank loans. Exposures are categorised as high physical risk if a firm's probability of suffering from a wildfire or a river or coastal flood in a given year is over 1%. On a wider European level, the ECB highlighted that large com- panies seem to be the biggest polluters, contributing almost 90% of the overall emissions as against 50% in terms of their to- tal exposures. Given that large companies produce the greatest emissions, and represent the largest share of loans, the ECB said that they could be seen as the biggest source of transition risk for the banking sector. A potentially worrying obser- vation is that while bank loans are well diversified across sec- tors, the highest emitters rep- resent more than 30% of banks' portfolios. These sectors include manufacturing, and wholesale and retail. The two sectors re- ceive one-third of total euro area bank loans, but this rises to 40% when banks' exposures to trans- port and electricity and gas are included. Malta's average emission in- tensity is on the lower side of the Euro-area spectrum, at roughly 700 tonnes of CO2 per euro. The European average stands closer to 775t/CO2 per euro. In terms of physical risk, Mal- ta scores low. The scores them- selves reflect the intensity and magnitude of natural catastro- phes over a 30-year-horizon, namely wildfire, flooding and sea level rise. While Malta is categorised as low risk, it seems that Gozo is more prone to "other hazards" that affect the economy as a whole, as opposed to individual firms. Malta isn't alone. Regions lo- cated in southern Europe are ex- pected to suffer relatively more from wildfires due to their prox- imity to the equator. Meanwhile, countries located in eastern and central Europe are expected to increasingly suffer from flooding risk. Firms exposed to high transi- tion and physical risks tend to be concentrated in resource-in- tensive sectors, including agri- culture, mining, electricity and gas, and water supply and waste. However, vulnerability to high physical risk is spread out far more homogenously across sec- tors. nmeilak@mediatoday.com.mt Climate: Maltese banks stand to lose, says ECB

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