Estimating German Bank Climate Risk Exposure using the EU Emissions Trading System

Abstract

Addressing climate change as well as the role of banks in this process requires better measures about the exposures of firms and banks to climate related risks. We usually have data for large, publicly listed firms due to enhanced disclosure requirements. In this paper, we provide first estimates specifically for SMEs (and thus privately-held firms) and close an important data gap. We focus on German banks and measure their exposure to climate risk using CO2 emissions reported for German firms in the European Union Emissions Trading System (EU ETS). We summarize ways through which CO2 emissions may increase bank risk, and investigate the concentration of emissions, companies, and plants within the portfolios of German banks. Overall, our approach accounts for 61.25% of the German emissions covered under the EU ETS. We document that only 19 German banks concentrate 95.88% of the total CO2 emissions in their portfolios. While we focus on Germany, this approach can easily be extended to all European firms in the EU ETS.

Keywords: Climate change, banks, CO2 emissions, private firms, Germany

JEL Classification: G18, G32, G38, Q54, Q55