From Charting Course To Staying Course: Path Ahead For Climate And Nature Risk Supervision

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the ECB industry dialogue on "Climate and nature risk management: taking stock and looking ahead"

Introduction

Good morning and a very warm welcome to our industry dialogue on climate and nature-related (C&N) risks.^[1]

It is great to see so many of you here today to share your views, discuss progress and explore solutions to the challenges we still face. Together, we have all come a long way since we first started discussing C&N risks in 2019.

Back then, the idea of C&N risks featuring structurally in banks' risk appetite, risk management and stress-testing frameworks seemed a distant goal.

Today, however, we can see that banks across Europe have made impressive strides in building the capacity to account for C&N risks. Thanks to the hard work of many - not only in the boards but also in front offices, risk management and internal audit, to name just a few areas - considerable expertise has been built up. As a result, European banks have made good progress in identifying and managing C&N risks - and, crucially, in seizing the business opportunities from the transition that our economies are undergoing. Industries such as cement, steel, energy and shipping are part of the backbone of the European economy, yet they are also some of the largest contributors of emissions. With that in mind, I am particularly pleased that representatives from the corporate sector will speak to us about their own decarbonisation and adaptation journeys later today. Close collaboration between corporates and banks is an essential driver of decarbonisation, and the associated transition finance presents a clear business opportunity for banks.

Supervisors and banks have taken action

But let me start by taking you back ten years, almost to the day, to Mark Carney's landmark speech on the tragedy of the horizon^[2]

- a speech that brought climate change squarely into the realm of financial stability. Decisive action has been taken since then.

When the ECB started discussing C&N risks with banks, we were moving very much in lockstep with many other prudential authorities around the world, drawing on the experiences and practices developed in the Central Banks and Supervisors Network for Greening the Financial System (NGFS). Back in 2019 the NGFS had 45 members; today it has grown to 149 central banks and supervisors that all agree on the relevance of C&N risks in the pursuit of their mandates.^[3]

But supervisors have not been alone in taking action: insurers, investors, financial market participants and banks have charted a course from awareness to preparedness.

Looking at the banks under our supervision, we see that they now have the institutional architecture in place to identify, monitor and manage C&N risks.^[4]

This means that all banks have defined key risk indicators for climate risk and have included climate risk in their stress-testing frameworks, while the vast majority of banks also have frameworks in place to start quantifying some capital needs.

That being said, there is still more work to do to make sure that banks are applying sound practices across all relevant portfolios, exposures and risk categories, and that they are effectively implementing their policies across the board. And we also need to continue improving measurement and estimation methodologies and broaden the risk management toolkit to enhance banks' resilience ahead of time.

In light of this greater preparedness and the challenges that remain, some may wonder about the path ahead for C&N risk supervision. Are we staying the course in ensuring that banks adequately manage their C&N risks? And do current discussions about banks' competitiveness have an impact on our commitment?

Staying the course remains crucial

Let me start with the first question: are we staying the course? Considering the materiality of the climate and nature crises, taking a step back is not an option.

C&N risks are not just appearing at distant time horizons but are becoming an increasingly immediate concern for financial stability and economic growth.^[5]

Consider that, in the next five years, extreme weather events could account for a loss of up to 5% of euro area economic output. That would be a shock similar in magnitude to the great financial crisis.^[6]

Analysis by the ECB, the University of Oxford and the London School of Economics shows that too much water, too little water or polluted water pose the most urgent risk to economic output in the euro area.^[7]

The insurer Munich Re reports that damage from natural disasters has already increased from an average of USD 131 billion per year over the past 30 years to USD 320 billion in 2024 alone.^[8]

Similarly, Swiss Re records insured losses climbing by 5% to 7% every single year.^[9]

And the trend is only moving upwards.^[10]

Science is also clear about what is still to come: global heating is on the brink of passing 1.5 degrees; the world is on track for an average temperature increase of 3.1 degrees by the end of the century^[11]

; and Europe, the fastest-warming continent, is heating up at twice the global average^[12]

And just earlier this week the European Environmental Agency warned that the degraded state of our natural ecosystems is putting our European way of life at risk.^[13]

From a risk-based perspective, there is no other option but to stay the course and continue to ensure that banks are resilient to all material risk drivers.

Taking a step back on C&N risks would mean failing to account for a material factor that determines banks' soundness. No matter where political headwinds are blowing, the risks from climate change will stay, be it from physical or transition risks - and likely a combination of both.^[14]