Banks across the European Union have made “significant strides” in addressing and managing climate and nature-related risks, according to Frank Elderson, European Central Bank (ECB) Executive Board Member and Supervisory Board Vice-Chair. Elderson highlighted substantial advancements in advanced practices for identifying and monitoring these risks by banks over recent years.
Despite acknowledging the progress, Elderson stated more effort is required by European banks to extend these risk identification and management practices across all relevant exposure areas and risk categories. His comments follow the ECB’s decision in late 2022 to prioritise climate change as a central focus for bank supervision from 2023 to 2025. The ECB’s climate stress test earlier that year revealed an urgent need for banks to incorporate climate risk into their risk management frameworks, with many banks still significantly exposed to emissions-intensive industries.
Elderson highlighted several key metrics illustrating the progress made by banks on climate and nature-related risks. By the end of 2024, over half (56%) of banks were implementing leading climate-related and environmental risk management practices for at least some exposures aligned with ECB supervisory expectations, compared to just 3% in 2022. Additionally, the proportion of banks lacking any such practices dropped from 25% in 2022 to only 5% by 2024.
The ECB also observed significant progress in advanced practices, noting that banks’ materiality assessments have become more sophisticated. Over 90% of banks now consider themselves materially exposed to climate-related and environmental risks, a notable increase from only half of the banks reaching this assessment in 2021. Furthermore, all banks now include climate risk in their stress testing frameworks, whereas only 41% did so in 2022.
While recognising the progress, Elderson noted areas for further improvement. The ECB found that although banks broadly incorporate sound practices in their climate and environmental risk management frameworks, many apply these only to a subset of their relevant exposures, risk categories, and geographical areas. Specifically, the ECB pointed out that mortgage lending is not always fully considered in banks’ management of climate and nature-related risks. Banks are more advanced in addressing credit risk than operational or market risk.
Additionally, while banks are now integrating climate risk in their stress testing frameworks, the ECB noted that some have not yet included all material risk drivers, relevant portfolios, or transmission channels and may still underestimate these risks. Most banks still do not cover all material climate and nature-related risk drivers in their capital adequacy assessments.
Elderson expressed appreciation for the efforts made, stating, “This progress has not come out of thin air. It has been achieved thanks to the hard work of many motivated bankers – including climate risk experts, risk managers and internal auditors – all across Europe in all types of banks, be they big, small, local or global. I would like to express my appreciation for these efforts. The progress made is also a testament to the effectiveness of the ECB’s multi-year strategy to ensure banks build up resilience to climate and nature-related risks.”