Beyond Paris: Europe's +2.4°C Reality and What it Means for Capital Markets

Europe is identified as the fastest-warming continent, and the top 10 countries with the biggest 2023 increases all lie in Europe. The following analysis is based on the UN Food and Agriculture Organization (FAO) dataset, which reports annual land temperature changes compared to the 1951 – 1980 average. Why This Matters

• Global mean annual temperature change on land reached +1.8°C over 1951 – 1980.

• Europe saw a mean annual increase of +2.4°C in 2023, and in seven of the past nine years the increase exceeded 2°C.

• The benchmark of +1.5°C per year set by the 2025 Paris Agreement was exceeded in almost all regions, only excluding Oceania.

Fastest Warming Region on Earth is Europe

Excluding outliers, the top 30 fastest warming countries list includes only three non-European entries – Kazakhstan, Morocco & Tunisia.

• The highest annual rises in Europe in 2023 are both CEE – countries, Romania & Slovenia with a rise of 2.6°C.

• Western-European countries saw similar increases, e.g. Germany, Spain, and France all with increases higher than 2.4°C.

Why is Europe warming so quickly?

A big part of Europe has a lot of land at high northern altitudes, which warm faster due to Arctic amplification. Europe is exposed to Arctic amplification as sea ice loss increases heat transfer from the ocean to the atmosphere, accelerating warming. Also, due to European countries beginning to clean-up emissions, a certain amount of sun-blocking caused by air pollution and aerosols has also declined.

The European averages over the last ten years tell the story.

• The top 15 fastest warming countries are still in Europe, with Eastern European countries showing a very high average of +2.2°C.

• Southern Europe warms slower, but still above the benchmark of the Paris Agreement – e.g. Turkey +1.6°C and Italy +1.8°C.

• Europe's global warming exceeds global trends with the 3-year average, 2023-2025, greater than the 1.5°C threshold for the first time in history. 

These increased temperatures cause negative extreme weather impacts such as global heatwaves, longer marine heatwaves, frequent and intense precipitation events, extreme droughts risk, and many other destructive events that impact communities and businesses.

Climate Change Presents a Systemic Risk to European Financial Systems

Climate change presents a systemic risk to the European macro-fiscal and financial system and the real economy.

The economic impacts of climate change on companies translates into risks to European financial systems. These systemic European risks include:

• Sovereign and sub-sovereign credit risks.

• Market risks in the primary and secondary markets.

• Underwriting and lending risks.

These risks amplify throughout the European financial system by compounding individual risks as multiple risks correlate and as a result increase overall negative impacts via financial contagion. For example:

• Faster warming translates to higher environmental damages through natural disasters such as floods, droughts & earthquakes – impacting insurance costs, asset values and capital expenditures to sustain equipment and land.

• As climate impacts worsen, European authorities will likely tighten regulations to ensure a sustainability-focused transition. Higher taxes on “brown” projects and financially favourable regulations for green innovation are expected.

• This shifts where sustainable financial returns may come from increased spending on resilience (e.g. grids, buildings, water & heat) and faster repricing of exposed, existing assets. (OeNB, 2019).

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