Climate change and the transition to a low-carbon economy will be one of the greatest challenges facing Norwegian firms in the years ahead. Borrowers unable to tackle these changes present risks to the banking sector.  

Analyses of the economic implications of climate risk often make a distinction between physical risk and transition risk. Physical risk is linked to the direct impact of climate change, such as rising temperatures and more extreme weather. Transition risk is related to various forms of adaptation to lower emissions, such as changes in climate regulation, new technology and changing investor and consumer preferences.  

Norwegian banks are particularly exposed to climate risk through loans to firms subject to higher costs and with weaker debt-servicing capacity as a result of climate-related changes. High-emission firms may be subject to higher taxes and may need more investment to replace existing technology. 

Energy efficiency requirements may raise property and housing-related costs. Weather and climate changes may trigger higher insurance costs and the need for investment in climate-related adjustments. In the event of abrupt changes, higher costs among businesses and households may entail higher losses for banks than would have otherwise been the case. Banks can reduce risk by including climate-related factors in their risk assessments.  

Since 2019, Norges Bank has conducted several studies of how climate change affects risk in Norwegian banks and credit institutions. These studies are often called climate stress tests and assess how increased costs resulting from climate change can affect bank losses. Climate stress tests are an important tool used by central banks to understand the effect of climate change on the financial system. Norges Bank's climate stress tests are based on the Network for Greening the Financial System's (NGFS) climate scenarios.