Annex: list of potential transmission channels that institutions may consider

Institutions should consider transition risks arising from the shift towards a more sustainable and low-carbon economy. These may include policy and legal risks (such as new carbon pricing mechanisms or stricter environmental regulations), technological risks (such as the obsolescence of high-emission assets), and market risks (such as shifts in consumer preferences or demand patterns).

Microeconomic channels:

• • Corporates are no longer profitable or overly indebted, or at risk of becoming so, due to increasing environmental costs (e.g. costs for transitioning to greener technologies, supply chains and production processes, increasing energy costs, increasing taxation on emissions, commodity price volatility, resource scarcity premiums) and/or changes in consumers’ preferences and competitive dynamics.
• • Assets are stranded or significantly impaired, or at risk of becoming so, as they are no longer adapted to current standards or consumer preferences.
• • Corporates are legally liable, given a partial failure to align with the transition.
• • Households bear transition costs (e.g. costs of bringing properties up to standard or capital loss on sale, increased taxation, higher energy prices, increased cost of basic goods and services) that significantly affect their financial condition and loan demand.

Macroeconomic channels:

• • Fundamental change to energy mix, energy price levels and patterns of energy use – driven by climate mitigation efforts, pollution control, resource scarcity, etc. - that affects the whole economy;
• • Significant shifts in prices, especially for energy-intensive or environmentally harmful products;
• • Productivity changes;
• • Labour market frictions resulting in unemployment and sectors under pressure due to the lack of skilled workers;
• • Changes in consumer and market preferences;
• • Other impacts on international trade, government revenues, fiscal space, interest rates and exchange rates. FINAL REPORT ON GUIDELINES ON ENVIRONMENTAL SCENARIO ANALYSIS

Institutions should consider acute risks resulting from the increasing frequency and severity of extreme climate or weather events (such as heat waves, floods or water sources contamination) and chronic risks arising from long-term shifts in climate and weather patterns (such as rising average temperatures, sea level rise or decline in pollination).

Microeconomic channels:

• • Corporate profitability is impacted by severe disruptions to business or the value chain due to highly adverse environmental conditions, by gradual deterioration due to working conditions, or by rising costs (e.g. adaptation costs, price of key inputs);
• • Household income is affected by environmental disruptions, by gradual deterioration of economic activities, or by impact on health;
• • Corporate assets or household properties are damaged by severely adverse weather conditions or gradually deteriorated (e.g. shrink-swell of clays);
• • Companies and households bear higher maintenance and adaptation costs, or even reconstruction costs.

Macroeconomic channels:

• • Knock-on effects of severely adverse weather, pollution incidents, water scarcity and other global warming and ecosystem degradation effects to the entire economy of a certain geographical area;
• • Significant shifts in prices from supply shocks resulting in inflationary pressure;
• • Reduced workforce productivity and health impacts;
• • Supply chain disruptions and resource scarcity;
• • Migrations and displacements. FINAL REPORT ON GUIDELINES ON ENVIRONMENTAL SCENARIO ANALYSIS