As Crisis Fatigue Sets In, Denmark’s Central Bank Doubles Down on Climate Risk

Key Takeaways

• Climate Risks Are Escalating: Denmark’s central bank governor Signe Krogstrup warned that climate change is no longer a distant threat, with record-breaking heat and rising economic losses from extreme weather already impacting financial stability.
• Scenario Analysis Is Essential: Krogstrup emphasized the role of scenario analysis in assessing transition and physical climate risks, highlighting Denmark’s tailored modeling efforts in collaboration with the DREAM institute.
• Data Gaps Remain a Challenge: While progress has been made, the lack of standardized, high-quality climate data continues to hinder effective risk assessment. Krogstrup cautioned against EU reporting simplifications that might compromise transparency.
• Central Banks Have a Role: Although climate policy is a government responsibility, financial risks linked to climate change fall within central bank mandates, particularly in safeguarding price and financial stability.
• Global Collaboration Is Critical: Krogstrup called for greater cross-sector and international cooperation, noting that no single institution can manage the complexity of climate-related financial risks alone.

Deep Dive

At a time when financial leaders are juggling cyber threats, inflation worries, and geopolitical rifts, Denmark’s central bank governor Signe Krogstrup is asking them to keep one eye firmly on the horizon, because the climate risks aren’t going anywhere. Speaking at the central bank’s climate conference on June 19, Krogstrup didn’t sugarcoat the moment.

“Much like a wave on the horizon,” she said, “we may not know its exact shape or timing, but we can be confident of its arrival.”

And that arrival is already underway. With last year clocking in as the hottest on record, outpacing even the scorcher that was 2023, and extreme weather wreaking financial havoc around the globe, climate risk has shifted from hypothetical to here-and-now. In Krogstrup’s view, it’s time the financial system acted like it.

Yes, central banks are fielding multiple fires at once, from economic fragmentation to digital security threats. But Krogstrup made the case that these shouldn’t crowd out climate concerns. Quite the opposite.

“Rather than looking away,” she said, “the many concurrent challenges should reinforce our commitment to addressing them in a risk-based, prioritized manner.”

It’s not about panic, it’s about planning. And for central banks, that means weaving climate risk into the very fabric of how they assess and manage financial stability.

What Denmark’s Central Bank Is Actually Doing

Krogstrup laid out five pillars of the bank’s climate strategy—not just ideas on paper, but active programs that touch nearly every corner of its mandate:

• Running macroeconomic and financial stability scenario analyses to understand how the green transition could rattle (or strengthen) Denmark’s economy and banks
• Collecting and publishing financial exposure data related to climate, to improve transparency and support better risk assessments
• Factoring climate into the management of Denmark’s foreign exchange reserves
• Tracking and reducing the bank’s own emissions footprint
• Issuing green bonds on behalf of the Ministry of Finance

It’s technical work, sure, but it all circles back to the same goal of reducing systemic vulnerability in an increasingly unpredictable world.

The Case for Climate Scenarios and Better Data

Krogstrup spent time walking attendees through how scenario analysis has become a go-to tool in central banking — not just for climate, but post-2008 financial system stress testing more broadly. But the climate scenarios are more complex, she admitted, because they blend science, economics, and policy guesses into models that aren’t yet as precise as the financial sector might like.

Still, Denmark’s central bank is pressing forward. It’s already published detailed scenario analysis for Danish credit institutions and has teamed up with the DREAM economic modeling institute to understand transition impacts across sectors.

And the next frontier? Physical risk. Krogstrup pointed to tools like flood modeling developed by the Technical University of Denmark, which the central bank is now combining with micro-level housing data to understand how extreme weather (like storm surges) could impact property values and, in turn, bank collateral.

But the Data Still Isn’t Good Enough

Data quality and consistency remain a sticking point. “We’ve come a long way,” Krogstrup said, “but there’s clearly a lack of standardized, comparable data on climate risks.”

And now there’s a new wrinkle: the EU’s Omnibus Package, meant to simplify sustainability reporting, is raising eyebrows among regulators worried that simplification might come at the cost of information. “We need to follow this closely,” she warned.

Throughout her remarks, Krogstrup came back to the need for collaboration — between central banks, regulators, banks, scientists, and frankly anyone with a stake in the future. Because no single institution can tackle climate risk alone. And few within the financial sector are climate scientists.

“We have to engage and learn from science,” she said, “and from each other.”

The conference itself reflected that spirit, with speakers from the ECB, the Bank of England, the University of Copenhagen, and others across sectors.

As she wrapped up, Krogstrup distilled her message into three takeaways:

1. The risk is real, and it’s getting closer. We can’t afford to treat climate as a back-burner issue.
2. Scenario analysis and better data are our best tools, but they need refinement.
3. Collaboration isn’t just helpful, it’s essential. No country or central bank is doing this in isolation.

So while the headlines may be filled with conflict and crisis, Krogstrup is urging financial leaders to think long-term, and stay the course.

Because, as she said, the wave is coming. And it’s time to get ready.

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