Climate risks for banks: management is improving, but there is still room for progress

EU banks have gradually improved their management of environmental risks. In 2022, 25 percent of banks in the European Union paid no attention to these risks, while 54 percent had only some basic practices in place. By 2024, these percentages had fallen to 5 percent and 17 percent, respectively, while 56 percent of institutions had some advanced and well-established practices in place, according to ECB data.

In recent years, the ECB has made it mandatory to conduct materiality assessments and include climate risks in stress tests. “Today, more than 90% of banks consider themselves to be materially exposed to climate and environmental risks,” added Frank Elderson.

Even so, the ECB official points out that recent assessments often show that banks’ current good practices only cover a subset of exposures, not all risk categories or all geographical areas. Most progress has been made in covering climate risks in credit risk analysis, but there is still much room for improvement, such as operational risk and the inclusion of physical climate change risks in mortgage collateral valuations.