The paper provides an assessment of the relevance of climate risks for the Italian financial system including the banking, insurance and pension fund sectors. Five macro-climate scenarios are proposed and their implications for the profitability and risk profiles of non-financial sector assets held in the portfolio of financial institutions are assessed.
The results show that high mitigation scenarios (i.e. consistent with the Paris agreement emission targets) look very ambitious in terms of the required increase in energy prices and could have significant contractionary effects on the economy, with implications for bad loans rates and asset values.
Lower carbon price increases accompanied by public spending to support the green transition, as foreseen by the NGEU, could go a long way to containing temperature increases and would be less recessionary. Under this scenario, climate transition risks for aggregate Italian financial institutions look manageable.
These results rest on the portfolio of Italian financial institutions, which is concentrated largely on low emitting sectors. However, the complexity of the topic, data limitations, and a number of methodological assumptions imply that these results should be interpreted with caution.