Sweden's Riksbank staff memo finds limited impact of emissions pricing on banks’ credit risk and highlights data gaps

Sweden's Riksbank published a staff memo analysing how putting a cost on companies’ greenhouse gas emissions could affect Swedish firms’ profitability and, in turn, banks’ credit risk. Based on the data and method used, the authors find little evidence that emissions pricing would lead to significant credit-loss provisions in the banking sector, mainly because banks’ lending is concentrated in lower-emission sectors. The analysis estimates company-level production-based emissions from sector data and links these to corporate lending in the Riksbank’s KRITA database, covering around 150,000 companies (2022) and around 95% of Swedish banks’ lending to Swedish companies. An emissions cost of EUR 65 per tonne CO2eq (EURSEK 11.5) is stressed to EUR 130 and EUR 195. Although about 1% of companies account for just over 81% of emissions, they represent less than 10% of bank loan volumes. Under the scenarios, around 1–3% of companies (about 2,000–5,000) move from an interest coverage ratio above 1 to below 1, associated with SEK 27–46 billion of bank loans; applying simplifying IFRS 9-based assumptions (Stage 1 provisioning rate 0.1%, Stage 2 2.5%) implies provisions of around SEK 644 million at EUR 65/tonne and just over SEK 1 billion at EUR 195/tonne. The memo cautions that the approach may understate risk because it does not capture within-sector variation, cross-sector value-chain dependencies, or exposures outside Swedish banks and Swedish companies, and it does not address other transition risks or physical risks such as floods and fires. It calls for better emissions and value-chain data, which is expected to improve as the EU Corporate Sustainability Reporting Directive (CSRD) is implemented.