Climate-Related Stress Testing and ESG Risk Management in European Banking Portfolios: Evidence on Physical and Transition Risk, Resilience, and Strategic Transformation
Year: 2026
Type: article
Abstract: Climate-related stress testing translates physical and transition hazards into banking losses, yet European exercises differ materially in horizon, balance-sheet assumptions, portfolio coverage, and purpose. This article asks what those exercises reveal about the resilience of European banking portfolios and how environmental, social, and governance risk management must develop. A structured comparative review of the twelve supplied supervisory publications and recent peer-reviewed research finds that aggregate systems generally absorb tested losses, but resilience is conditional. Disorderly transition produces concentrated impairment in carbon-intensive sectors, whereas unmitigated physical risk dominates over longer horizons through collateral damage, business interruption, and declining insurance. Reported losses are often lower bounds because market, liquidity, operational, litigation, and second-round channels remain incomplete. Banks should therefore integrate counterparty transition plans, geocoded collateral, climate-sensitive credit parameters, dynamic multi-hazard scenarios, and links to pricing, provisioning, capital planning, and portfolio strategy. Orderly transition is the least-cost route, provided that steering supports credible corporate adjustment rather than abrupt or socially regressive withdrawal.
Author: Mahan Tahvildari
Language: English
Subfield: Finance
Domain: Social Sciences
SDG: Climate action
Open Access status: hybrid
OpenAlex ID: W7214538754