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The European Central Bank (ECB) has announced that banks under its supervision have made substantial strides in identifying and managing climate and nature-related risks. This progress reflects intensified efforts by financial institutions to integrate environmental considerations into their risk management frameworks, though the ECB emphasizes that further work is still needed.
According to the report published on July 11, 2025, a significant majority of banks (56%) had adopted leading climate-related and environmental risk management practices for at least some exposures by the end of 2024, a notable increase from just 3% in 2022. Furthermore, the percentage of banks lacking any such practices plummeted from 25% in 2022 to only 5% by the end of 2024. All banks now reportedly include climate risk in their stress testing frameworks, up from 41% in 2022.
Banks’ ability to assess and understand their material exposure to climate and environmental risks has significantly improved, with over 90% now considering themselves materially exposed.
Advanced practices for identifying and monitoring these risks have become more prevalent across the banking sector.
Climate risk is now integrated into stress testing frameworks by all banks under supervision.
Despite this notable advancement, the ECB has identified areas requiring further attention:
Many banks still apply sound practices only to a subset of their relevant exposures, risk categories (e.g., operational and market risks are less covered than credit risk), and geographical areas. Mortgage lending, for instance, is often not fully considered.
While integrated, some stress tests do not yet cover all material risk drivers, relevant portfolios, or transmission channels, potentially underestimating risks. Most banks also do not yet fully cover nature-related risks in their stress tests.
Continuous improvement is needed in data availability and modeling capabilities for a more granular and forward-looking assessment of climate and nature-related risks.
In a related development on July 29, 2025, the ECB also announced its decision to introduce a “climate factor” into its collateral framework, effective in the second half of 2026. This measure will allow the ECB to reduce the value assigned to eligible assets pledged as collateral based on their exposure to climate-related transition risks, further embedding climate considerations into its monetary policy operations.
The ECB’s latest findings underscore a positive shift in how European banks are approaching climate and nature-related financial risks. While significant progress has been made in establishing foundational risk management practices, the journey towards fully embedding these considerations across all operations and maintaining comprehensive stress testing is ongoing. The introduction of the “climate factor” in the collateral framework signals the ECB’s continued commitment to ensuring financial stability in the face of environmental challenges.
