Man painting pollution green

Climate-related risk is increasingly important to financial institutions, but European regulators are now examining the threat to a key component of financial market infrastructure — central counterparties (CCPs).

The European Securities and Markets Authority (ESMA) launched a consultation on assessing climate risk within the stress-testing framework for CCPs, such as clearinghouses.

The consultation sets out a series of possible climate risk considerations, such as changes in climate policy that trigger a sharp market downturn, severe weather events that prompt sharp swings in certain asset prices, overexposure to dirty sectors (for example, clearing oil futures), and risks that could emerge as collateral eligibility evolves.

In response, ESMA is also seeking to integrate potential climate risks into its stress testing framework for CCPs as part of its efforts to enhance the resilience of infrastructure firms to adverse market conditions.

“The assessment of climate risk within CCPs is still in its infancy at the level of individual CCPs, and to our knowledge, no cross-CCP climate stress test has been carried out” in any jurisdiction, ESMA said in its paper.

Comments on the consultation are due by April 21.