ECB 'sees up to 45% hit to EU property values from climate change floods'

Damaged houses at the Ahr river in Insul, Germany, last July. The ECB is factoring in a 45% slump over a single year for property values in areas that are likely to experience bad flooding. Picture: AP 

European banks have been told to assume that real-estate assets most exposed to flood risk could lose almost half their value, as the sector’s resilience to climate change is stress-tested over the coming months.

The ECB is factoring in a 45% slump over a single year for property values in areas that are likely to experience bad flooding, Fernando de la Mora, a managing director at Alvarez & Marsal, told Bloomberg ahead of the expected publication of the ECB’s scenarios later this week. That would leave German and Dutch banks among the most exposed. An ECB spokeswoman declined to comment.  

Europe, which was left in shock last year after floods devastated parts of western Germany and Belgium, is pushing banks to brace for potential losses as global warming and its political fallout send tremors through the wider economy. The ECB review is one of the most detailed of its kind to date, and examines everything from the impact of higher carbon prices to the implications of greater home energy efficiency for the mortgage market.

“What’s more concerning are the physical risks”' said Mr de la Mora, who is working with lenders to guide them through requirements laid out in the stress tests.

An ECB review last year found that 22% of eurozone bank exposures face high physical risk, more than half of which are related to wildfires, with floods making up the bulk of the remainder. The review by the central bank in September found that Austria, the Netherlands, Germany and France are more exposed to flooding, while wildfires pose a bigger threat in Italy and Spain. 

Meanwhile, the European Commission has been told by a key expert group that planned adjustments to its green rulebook risk raising greenhouse gas emissions and undermining the EU's reputation as a bastion for environmentally friendly finance.

The Platform on Sustainable Finance, which is one of just two groups assigned the role of providing official feedback to the European Commission, said that even the best performing gas-fired facilities couldn’t qualify as green or transition assets. 

The findings mark the latest bodyblow to the credibility of th EU’s green rulebook, once touted as an international gold standard in steering capital toward sustainable projects. 

However, the findings are unlikely to derail the planned adjustments. At least 20 of the EU’s 27 member states would need to unite against the plan for it to fail.

Under the commission’s proposal, which is due to be adopted this week, “new gas plants could be called green and sustainable, even though they never reach below the average greenhouse gas emissions level for the European grid,” said Nathan Fabian, the platform’s chair. “These would be polluting plants with no guarantee they will ever be green.”