Examining banks' response to climate risks: Insights from Portugal

Abstract

Banks play a pivotal role in the economy and are exposed to various financial risks, including those stemming from climate change. In addition to physical, direct, or indirect risks, transition risks have attracted special attention from boards of directors, particularly banks facing stringent regulatory deadlines (such as the green asset ratio and the banking book taxonomy alignment ratio), along with other obligations under the CRR directive and CSRD/ESRS requirements. In the Eurozone, the ECB has increasingly taken a proactive role in monitoring banks’ resilience to transition risks, notably through stress tests to ensure financial system stability. In Portugal, banks have been engaged in an ongoing process of sharing, planning, and identifying exposure and vulnerabilities, aiming to preserve their functions in society at large.