The European Central Bank has announced the launch of stress tests on climate risks to assess the ability of eurozone banks to absorb financial shocks from climate change, Reuters and DPA report.

The exercise will start in March and will take place in the first half of 2022. The results will be published by the ECB in July.

“This is not a test that banks pass or not,” it is rather meant to identify vulnerabilities, best practices and difficulties caused by climate change. Therefore, stress tests will not have direct implications on the level of capital of banks, the ECB says.

However, the test results will be included in the analysis and review process and could indirectly affect capital requirements, the Frankfurt-based institution said.

The ECB will focus on banks’ exposure and the most vulnerable sources of revenue, combining traditional loss projections with “quantitative collection of new data”.

One year ago, the ECB met its expectations on climate risks, but so far banks have been slow to adjust, and the Frankfurt institution has repeatedly called on them to speed things up.

Recently, Frank Elderson, a member of the ECB’s executive board, said the European Commission’s proposal to introduce legal requirements for banks to develop plans to transition their business to carbon neutrality was “welcome”. He added that the ECB will help monitor banks’ progress during that transition.

Last year, the European Central Bank released the results of the first stress test on the effects of climate on the economy, which shows that the failure to introduce policies to reduce climate change could significantly affect the European economy by the end of the century.