Banks in Europe have taken steps to address climate risks, yet further actions are required for comprehensive progress.

European banks have been making significant strides in addressing climate risks, according to Frank Elderson, a member of the Executive Board of the European Central Bank (ECB).

Elderson noted that climate and nature-related risks are already a reality and their materiality is rising. In response, banks under European supervision have been taking action.

All banks have now included climate risk in their stress testing framework, a significant step towards ensuring they are prepared for potential climate-related disruptions. Moreover, more than half of banks have adopted leading practices for some climate exposures, up from only 3% in 2022.

The ECB plans to publish a collection of good practices observed in banks across Europe later this year, highlighting the progress made in this area. However, there is still room for improvement, as three-quarters of banks do not yet cover all material climate and nature-related risk drivers in their Internal Capital Adequacy Assessment Processes (ICAAPs).

Elderson emphasized the importance of banks making their ICAAPs more comprehensive to ensure their capitalisation is commensurate with the underlying risk. He warned that experts are forecasting climate change will have serious long-term effects on house prices and other asset values.

The ECB is finalising its assessment of which banks met its deadline of the end of 2024 to include climate-related and environmental risks in their stress testing and ICAAPs. As of now, only one-third of banks explicitly integrate climate-related risks into their capital plans.

Banks under European supervision are well positioned to meet the prudential transition planning requirements that will come into effect in 2026. However, there is currently no publicly available, comprehensive list of European banks that have not yet fully integrated all relevant environmental and climate risk factors into their ICAAPs, as reporting on this topic is not standardized and detailed disclosures are limited.

The ECB will host an industry conference on October 1, providing an opportunity for banks to share their experiences and learn from each other in the ongoing effort to manage climate risks.

It's important to note that as of July 19, 2025, only 5% of banks had no practices in place for managing climate risks, down from a quarter in 2022. Risk assessments by banks are becoming increasingly sophisticated.

Allianz has warned that more natural disasters might mean that insurers would no longer be able to operate, creating a systemic risk that threatens the very foundation of the financial sector. European banking supervision aims to create a banking sector resilient to all material risk drivers, including those stemming from the climate and nature crises.

This article was last updated on July 19, 2025.

Banks in Europe have taken steps to address climate risks, yet further actions are required for comprehensive progress.