The Impact of Stranded Fossil Fuel Assets on International Financial Institutions: A Financial Exposure Analysis and Implications for European Central Banks and Financial Regulators

Abstract

This paper presents a comprehensive exposure analysis of international financial institutions (FIs) to stranded fossil fuel assets (SFFA) across 68 countries. The analysis disaggregates a 2.81 trillion US$ exposure of 6,510 FIs to the 26 largest publicly traded oil and gas companies (IOCs) and captures the SFFA-exposure not only through the equity but also through the bond channel. I present granular empirical insights on the composition and level of SFFA-exposure on the individual FI-level, the financial sectorial level, and the jurisdiction and international level. The results highlight the importance of bonds in the financial analysis because outstanding bonds account for almost 60% of the direct SFFA-exposure of the insurance sector alone. The paper draws on a new comparative framework of Risk-Levels for financial sectors that captures the financial risk and its diversification across different FIs. This uncovers financial stress and portfolio vulnerability of financial sectors and the respective country jurisdictions. The analysis reflects the highest Risk-Levels for pension funds and sovereign wealth funds in Norway, banks in France and the US, and insurance companies in the US and UK. With a focus on Europe, I stress the need to enhance prudential reforms by financial regulators. I argue that climate-related disclosure requirements alone are not sufficient to mitigate the far-reaching consequences of a high SFFA exposure of FIs. I discuss several measures for an intensified role of European central banks and financial regulators. These measures contribute to building a climate-resilient financial system.