ECB Weaves Climate & Nature Risks Deeper Into Monetary Policy & Supervision

Key Takeaways

• Climate And Nature Risks Are Now Embedded In Core ECB Work: The European Central Bank has completed its 2024–2025 plan, integrating climate and nature-related risks into monetary policy, banking supervision, and internal operations rather than treating them as stand-alone initiatives.
• Monetary Policy And Supervision Have Both Shifted: Climate considerations now feed into macroeconomic projections, the collateral framework, and corporate bond holdings, while banks face closer supervisory scrutiny and, where necessary, binding decisions on climate and nature risk management.
• Data, Stress Testing, And Scenario Analysis Have Been Strengthened: The ECB has expanded climate stress testing, updated its statistical indicators, and taken a leading role in developing climate scenarios through international networks.
• Nature-Related Risks Are Gaining Prominence: Beyond climate change, the ECB has formally acknowledged nature degradation in its monetary policy strategy, with water-related risks identified as particularly material for the euro area economy.
• Next Phase Focuses On Transition, Physical Risks, And Ecosystems: Future work will prioritise the green transition, the growing physical impacts of climate change, and deeper analysis of nature-related and ecosystem risks.

Deep Dive

The European Central Bank (ECB) says climate change and environmental degradation are no longer side considerations in its work, but factors that now sit firmly inside the institution’s day-to-day decision-making.

The ECB confirmed it has completed its climate and nature plan for 2024–2025, closing a two-year effort to weave climate and nature-related risks into everything from monetary policy and banking supervision to portfolio management and internal operations. The central bank framed the work as essential to protecting price stability and financial resilience as environmental risks increasingly shape the euro area economy.

Over the past two years, the ECB has sharpened how climate and nature risks feed into its monetary policy framework. Climate considerations now influence macroeconomic assessments and projections, including the treatment of transition policies such as the EU’s second Emissions Trading System. The Eurosystem has also continued adjusting its collateral framework and reducing the carbon footprint of its corporate bond holdings, reflecting a more systematic approach to aligning policy tools with climate risk analysis.

Behind the scenes, the ECB has also invested heavily in data and analysis. It has taken part in climate stress tests and scenario exercises, including the Fit-for-55 assessment, while helping lead global work on climate scenarios through the Network for Greening the Financial System. Its statistical climate indicators have been updated with new data and methodologies, improving visibility into sustainable finance trends, emissions reduction efforts, and the growing financial impact of physical climate hazards.

Supervision has been another focus. According to the ECB, banks across the euro area are now better prepared to identify and manage climate and nature-related risks, following sustained supervisory engagement. Where progress has lagged, the ECB has not hesitated to issue binding decisions, underlining that climate risk management is increasingly being treated as a core prudential expectation rather than a future aspiration.

The ECB has also turned the lens inward. Climate considerations have been further embedded into the management of its non-monetary policy portfolios, while emissions from its own operations fell by 39 percent in 2024 compared with 2019, keeping the institution on track toward its 2030 environmental targets.

Nature-related risks have gained clearer prominence as well. The ECB’s updated monetary policy strategy now explicitly acknowledges the implications of nature degradation, and internal research has pointed to the deep interconnections between ecosystems and the euro area economy. Water-related risks emerged as particularly significant, reinforcing concerns about how environmental stress can ripple through supply chains, production, and financial stability.

The ECB said its next phase of work will concentrate on three areas. These include supporting the transition to a greener economy by assessing banks’ prudential transition plans and analyzing energy and fiscal costs; strengthening macroeconomic analysis and data to better capture the physical impacts of climate change; and deepening understanding of nature-related risks, with a focus on ecosystem degradation and water stress.

These priorities will build on ongoing initiatives across monetary policy, supervision, and financial stability, including further development of climate stress-testing methodologies, continued application of climate factors in the collateral framework, and refinements to climate-related data, indicators, and disclosures. The ECB also said it will continue contributing to European and global policy discussions where relevant.

The central bank stressed that its approach is grounded in its legal mandate. EU treaties require environmental protection considerations to be integrated into policy design, and climate change has direct implications for price stability and financial stability. As those risks continue to intensify, the ECB signaled it intends to stay the course, treating climate and nature not as peripheral issues, but as structural forces reshaping the economic and financial landscape.

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