ECB’s Elderson Signals Climate Risk Is No Longer Optional for Banks or Central Banks

Key Takeaways

• Climate Risk Is Now Core to Central Banking: The ECB views climate and nature risks as integral to price and financial stability, not as peripheral policy issues.
• Banks Have Made Progress, But Gaps Remain: Most supervised banks have mapped climate risks, but inconsistencies and incomplete coverage persist, particularly around biodiversity.
• No Lending Restrictions, But Stronger Expectations: Banks remain free to finance sectors like fossil fuels, but must demonstrate robust risk management around those exposures.
• Deregulation Concerns Persist: Elderson warned against weakening post-crisis safeguards, emphasizing the fragility of trust in the financial system.
• Non-Bank Finance Under Scrutiny: Rapid growth in private credit and other non-bank sectors is prompting increased regulatory attention due to transparency and oversight gaps.

Deep Dive

A senior official at the European Central Bank has emphasized that climate and environmental risks are now a necessary part of how the institution assesses inflation, financial stability, and the resilience of banks.

In an interview published this week, Frank Elderson said the ECB does not set climate policy but must account for its economic effects as part of its core mandate.

The central bank’s responsibilities for price stability and financial stability, he said, cannot be fulfilled without considering the impact of climate and nature-related risks.

Elderson pointed to disruptions caused by extreme weather as an example. In 2022, low water levels on the Rhine River halted shipping for several weeks, contributing an estimated 0.7 percentage point increase in food price inflation. Ignoring such factors, he said, would mean overlooking a key driver of inflation.

The ECB has increasingly incorporated climate considerations into its economic models and operational framework. When banks borrow from the central bank, the value assigned to collateral now reflects, in part, its alignment with climate objectives such as those set out in the Paris Agreement.

Elderson said the ECB is also reviewing whether similar mechanisms could be applied more broadly as part of its operational framework, though he declined to comment on specific proposals such as differentiated interest rates for green and carbon-intensive activities.

For banks, the expectation is that climate and nature-related risks are treated as part of standard risk management. This includes exposures such as mortgage lending in flood-prone areas or financing infrastructure that may be affected by changing environmental conditions.

Supervisory pressure over recent years has led to significant progress. In 2019, around 25 percent of banks had begun assessing these risks. By the end of 2024, nearly all of the 112 banks directly supervised by the ECB had mapped their exposures, according to Elderson.

However, he said gaps remain. Some banks have not yet developed a complete view of risks across all jurisdictions in which they operate, while others have focused on climate risks without addressing biodiversity loss.

The ECB does not direct lending decisions, Elderson said, meaning banks remain free to finance sectors such as fossil fuels where permitted by law. However, supervisors expect those risks to be properly identified and managed, including potential legal and reputational impacts.

Beyond climate, Elderson warned against weakening post-financial crisis reforms. Banks are stronger than they were before the 2008 crisis, he said, but that progress should not be undermined, particularly in a period of economic uncertainty.

He reiterated support for implementing international capital standards under the Basel framework, while cautioning that deviations across jurisdictions should not lead to a “race to the bottom.”

Elderson also pointed to the growing role of non-bank financial institutions, including private credit providers, insurers, and pension funds. While these entities can strengthen the financial system by diversifying sources of funding, they are generally subject to less comprehensive supervision and are often less transparent.

Supervisors are now working to improve oversight and data collection in this area, he said, reflecting the sector’s rapid growth.

Elderson said completing the European Union’s banking union, capital markets union, and single market would be critical to strengthening the region’s financial system and supporting investment.

He added that these are areas where Europe can act independently, in contrast to broader global challenges that require coordination beyond the region.

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