Why This Matters for Financial Leaders

The European Central Bank has set out a new set of priority areas to further embed climate- and nature-related risks into its core activities. This signals a clear shift from strategy-setting to execution, with a stronger emphasis on how banks plan for the green transition and manage the growing physical impacts of climate change. For executives, the message is straightforward: climate and nature risks are no longer peripheral considerations—they are becoming embedded in prudential supervision, monetary policy, and financial stability assessments.

From Roadmap to Execution

These priorities follow the conclusion of the ECB’s Climate and Nature Plan 2024–2025, a two-year roadmap launched in early 2024 to address the increasing effects of climate change and environmental degradation on the economy and financial system. Over the past two years, the ECB reports that it has made tangible progress integrating these risks into its core work, including:

• Introducing a “climate factor” into the Eurosystem’s collateral framework, which influences how assets are treated in monetary operations.

• Reducing the carbon footprint of the Eurosystem’s corporate bond holdings.

• Expanding climate stress testing and scenario analysis.

• Strengthening expectations around banks’ ability to identify and manage climate- and nature-related risks.

Three Priority Areas Going Forward

Despite this progress, the ECB has emphasized that the economic and financial consequences of climate change and nature degradation are continuing to intensify. As a result, it will now concentrate its efforts across three priority areas:

1. Accelerating the Green Transition
   The ECB plans to step up scrutiny of banks’ prudential transition plans—that is, how banks are preparing their business models for a lower-carbon economy. This will be supported by deeper analysis of energy and fiscal transition costs, and by exploring how climate considerations could be further embedded into the ECB’s operational and monetary policy framework.

2. Managing Physical Climate Risks
   Recognizing the increasing impact of extreme weather and long-term climate shifts, the ECB will enhance macroeconomic analysis, improve climate-risk data and monitoring, and further assess whether banks have the capabilities needed to manage physical climate risks across their portfolios.

3. Addressing Nature-Related and Ecosystem Risks
   The ECB will also intensify its work on nature-related risks, with a particular focus on ecosystem degradation and water-related risks, reflecting growing recognition that biodiversity loss and resource stress can pose material financial risks.

Executive Takeaway

For banks and financial institutions operating in or connected to the euro area, the ECB’s direction is clear: expectations around climate and nature risk management are rising, and supervisory focus is broadening beyond climate transition to include physical and nature-related risks. Executives should view this as a signal to strengthen governance, data, and scenario planning now—well before these priorities translate into more explicit supervisory or prudential requirements.