ECB Banking Supervision outlines approach to climate and nature risks

ECB Banking Supervision's primary task is to ensure the stability and resilience of the banking sector, which includes addressing relevant risk drivers such as those arising from climate change and nature degradation.

The economic and financial consequences of these risks are already evident and intensifying.

The ability of banks to adequately manage climate and nature-related risks has been a supervisory priority and will continue to be over the 2026-2028 cycle.

Transition risks arise if climate policies are delayed, with NGFS scenarios showing that postponed action leads to higher risks for the economy and financial system.

However, an assessment by the ECB and ESAs, published in 2024, indicates that losses incurred by banks associated with the 'Fit for 55' package, should transition risks materialise, are unlikely to threaten financial stability in the EU.

The ECB supervises institutions to ensure robust strategies and systems for identifying, managing, and monitoring climate and nature risks over a 10-year horizon, as per Articles 87a(2) and 87a(3) of the Capital Requirements Directive.

Banks must test their resilience to long-term negative impacts under baseline and adverse scenarios.

New EBA Guidelines on environmental scenario analysis expect that by 2027, financial institutions will have developed stress testing and resilience analysis as complementary tools.

Resilience analysis supports institutions in adapting their business models.

The ECB is developing a framework to incorporate climate risks into regulatory stress testing, collaborating with the EBA and national authorities, including delayed or disorderly transition scenarios.