In a lecture at the University of Oxford published by the European Central Bank and explicitly presented as the speaker's personal views, Executive Board member Frank Elderson said climate change and nature degradation are material for inflation, monetary policy, financial stability and banking supervision, and that climate litigation is becoming a growing risk for the financial system. He linked climate and energy shocks to price pressures and argued that supervisory and analytical work now needs to extend from climate to broader environmental risks because these shocks affect firms, asset values and bank balance sheets directly and through supply chains. Slides cited ECB analysis showing that about 3 million of 4.2 million euro area companies are highly dependent on ecosystem services, and that 75% of banks' corporate lending, around EUR 3.1 trillion out of more than EUR 4.5 trillion, is to such borrowers. Water-related risks were presented as the most significant, with a 1-in-100 year drought putting 24% of euro area economic output at risk because of surface water scarcity and exposing 19% of banks' loans to non-financial corporations, with around half of overall nature-related risks linked to global supply chains. Elderson also reviewed the supervisory programme in place since 2020 and said the ECB has updated two publications on good practices for climate and nature-related risk management, while noting that these are not legally binding and do not set expectations or standards. He also described climate litigation against states, corporates, financial institutions and supervisors as a growing source of transition, stranded-asset, due diligence and greenwashing risk. As a next step, he said the ECB will soon publish analytical research on how nature degradation could affect probabilities of default and credit losses under different scenarios, while legislative mandates related to transition planning are being rolled out in 2025 and 2026.
European Central Bank2026-05-21
European Central Bank's Frank Elderson says nature risks are material for banks and signals forthcoming research on default and credit losses
The European Central Bank published a lecture by Executive Board member Frank Elderson, who argued that climate change and nature degradation are material for inflation, monetary policy, financial stability and banking supervision, and highlighted climate litigation as a growing financial risk. He cited ECB analysis showing euro area firms’ and banks’ high dependence on ecosystem services and water-related risks, and noted updated, non-binding ECB good practices on climate and nature-related risk management. Elderson said the ECB will soon publish research on how nature degradation could affect probabilities of default and credit losses.