Maltese financial institutions will remain “overall resilient” if faced with a tax on corporate CO2 emissions, the Malta Financial Services Authority has said.

A study by the financial stability function within the regulator suggests that financial bodies are equipped to weather “timely and adequate” policy related to climate enacted gradually, rather than “sudden and forceful interventions”, which would inevitably harm the financial system with a “disruptive” shift to low carbon assets.

“There is a general consensus that climate change risks are split into two main forms: physical risks – extreme weather events and an increase in global temperature due to the greenhouse gas emissions – and transition risks, which refers to the repercussions on the financial system of measures adopted to reduce emissions,” the MFSA said.

The study looked at the possible impact of a carbon tax on equity prices, bond prices and collective investment scheme (CIS) prices, considering six different scenarios of estimated losses in investment portfolios based on tax rates of $10, $20, $50, $75, $100 and $200 per ton of CO2 emitted.

Results indicated that equities would incur the highest losses, followed by CIS and bonds, particularly for companies that operated within the industries of the manufacturing of non-metallic mineral products, gas, steam and the air conditioning supply sectors.

“The analyses of the carbon tax impact within the three financial industries reveals investment funds as being the most susceptible to losses. Although the investment fund industry, overall, appears to be resilient to a carbon tax, a few funds are expected to suffer material losses. This impact is more prevalent across the non-domestic funds,” the study said.

“With respect to banks, across the six scenarios, the losses on their investment portfolio are expected to be limited. Moreover, the impact was found to be insignificant for the core domestic banks.”

The study said that adopting a strategy of gradually implementing climate policy would allow financial bodies to perform smooth adjustments with both their investment and business strategies in order to accommodate such changes without experiencing major losses.

Such losses, it explained, might trigger volatility in financial markets which could lead to the “fire sale” of carbon-intensive assets.

Overall, while some institutions might face losses, the majority would hold up well to transition, the study found.

“Although the study indicates that a small number of Maltese financial institutions could experience noteworthy losses following an abrupt and severe climate policy intervention, the overall investment portfolio held within the Maltese financial sector appears to be resilient to climate transition risk,” it said.

“The implementation of climate policies at a moderate level of intensity is expected to cause minor consequences on the Maltese financial system. However, this first exercise concentrates on the financial system’s investment portfolio. Taking into consideration other assets held within the financial sector, such as the loan portfolio, could result in different conclusions in terms of ultimate impact from transition risk.”

The MFSA said that future studies on the matter would look to enhancing coverage on the subject, including looking at the carbon footprint of banks’ loan portfolios and the trade of companies face between business model sustainability and the absorption of future carbon tax policy.