Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks. To this end, the European Central Bank (ECB) announced, in January 2024, that it would expand its climate change work in 2024 and 2025. Through its 2024-2025 climate and nature plan, ECB aims to focus on the nature-related risks, greener monetary policy, and the impact and risks of the transition to a green economy, including investment needs and transition costs.
As a banking supervisor, ECB emphasizes that institutions must adopt a strategic, forward-looking, and comprehensive approach to considering climate-related and environmental risks. ECB highlighted this in its comprehensive guide on climate-related and environmental risks, which was published in November 2020. In November 2022, ECB began applying additional capital requirements to banks that fail to effectively manage climate and environmental risks. At that time, ECB also set staggered deadlines for banks to progressively meet all the supervisory expectations laid out in its guide on climate-related and environmental risks by the end of 2024. This includes full integration into the Internal Capital Adequacy Assessment Process (ICAAP) and stress testing. ECB continues to incorporate climate-related risks into financial stability assessments, which include analyzing disclosure, pricing, and greenwashing risks in financial markets.
ECB plans to continue its work on climate risk as a top priority for 2024-2026. Very recently, in its climate and nature work plan, ECB announced that, as part of its expanded focus on climate risk, the regulator will be undertaking the following initiatives in 2024 and 2025:
- Bank supervision: Assess and follow up on banks’ alignment with ECB supervisory expectations, further integrate climate risks into prudential frameworks and support rules for better climate-related disclosures in European and international fora, and perform various supervisory actions on climate and environmental aspects, including preparatory work on transition planning
- Climate-related data: Regularly expand and release updates of climate change-related indicators, acquire and provide climate-related data, and integrate climate data points into its own data collections
- Stress testing and scenarios: Contribute to the Fit-for-55 stress test and chair the workstream of the Network for Greening the Financial System (NGFS) on Scenario Design and Analysis, leading the development of short-term scenarios and the provision of regular updates and improvements of long-term scenarios
- Physical impact of climate change: To better understand the physical impact of climate change on economic variables, explore the economic implications of the climate adaptation policies and associated investment needs that are required to make the economy more resilient to a changing climate
- Financial stability analysis: Incorporate green transition policies into conjunctural analysis and macroeconomic models, further develop risk monitoring and the macro-prudential policy framework, and continue work on sustainable finance
- Monetary policy strategy and implementation: Implement climate-related pool limits in the collateral framework, introduce climate-related disclosure requirements in the collateral framework from 2026, and consider climate change in the preparation of monetary policy decisions
- Other key aspects: Consider environmental aspects in the preparatory phase of the design of a digital euro, consider the relevance of environmental risks in the oversight of financial market infrastructures, and consider eco-design of the next euro banknote series and of banknotes with 100% organic cotton by 2027
Related links:
Learn more
Moody's climate risk solutions
When uncertainty complicates your risk planning and investment strategies, our robust data and trusted insights empower your business to make better decisions and navigate climate risk with confidence.