European Central Bank sharpens focus on climate and nature risks

The European Central Bank (ECB) has announced that it has completed its 2024–2025 climate and nature plan and will now intensify work on climate and nature-related risks across monetary policy, banking supervision and its own operations. The ECB reports that climate and nature risks are now embedded more deeply in day-to-day processes, from macroeconomic analysis and policy decisions to portfolio management and bank supervision.

A key outcome of the plan is the stronger integration of climate and nature considerations in the monetary policy framework. The ECB has adjusted the Eurosystem collateral framework, further reduced the carbon footprint of its corporate bond holdings and incorporated transition policies (such as the new Emissions Trading System 2) into its macroeconomic assessments and projections. It has also advanced climate stress testing and scenario analysis, including contributing to Fit-for-55 exercises and leading work on climate scenarios within the Network for Greening the Financial System, supported by enhanced climate-related statistics and indicators.

For the banking sector, the ECB highlights that banks are now better able to assess climate and nature risks, following sustained supervisory follow-up and, where needed, binding decisions. At the same time, the ECB has continued to integrate climate factors into its own non-monetary policy portfolios and cut emissions from its own operations by 39% in 2024 compared with 2019, in line with its 2030 environmental targets. The updated monetary policy strategy now explicitly recognises that nature degradation has implications for monetary policy, and ECB research identifies water-related risks as the most material nature-related threat for the euro area economy.

Looking ahead, the ECB sets three priority areas: supporting an orderly transition to a green economy (including assessing banks’ transition plans and exploring how climate considerations can be further reflected in the operational framework), strengthening the ability of the financial system to cope with growing physical climate impacts, and deepening analysis of nature-related risks and ecosystem degradation.