The European Central Bank has published Occasional Paper No 386 (authors’ views) assessing whether EU prudential guidance and Pillar III disclosure rules effectively embed climate change adaptation to physical risks in banks’ risk management. The paper concludes that, although climate change adaptation is a legal obligation in the European Union, its content is often blurred with mitigation in EU sustainability legislation and supervisory guidance, and banks’ stress tests, transition plans and Pillar III disclosures do not yet incorporate physical risk adaptation consistently. The authors argue for a more holistic approach in which banks integrate physical risk adaptation systematically into stress testing, transition planning and disclosures, including by setting explicit adaptation targets and covering physical hazards, exposure and vulnerability. Adaptation measures are framed as risk mitigants that should be reflected in credit risk parameters such as losses given default and carried through consistently into stress tests and transition plans. On transparency, the paper questions whether proportionality based mainly on bank size is well-suited to locally concentrated physical risks and suggests that proportionality should be assessed based on vulnerability rather than size, alongside greater harmonisation of scenario assumptions and modelling approaches used across the EU.
European Central Bank 2026-04-21
European Central Bank Occasional Paper finds inconsistent treatment of physical climate adaptation in EU banks’ stress tests, transition plans and disclosures
The European Central Bank’s Occasional Paper No 386 assesses whether EU prudential guidance and Pillar III disclosure rules effectively embed climate change adaptation to physical risks in banks’ risk management, finding adaptation remains blurred with mitigation and inconsistently incorporated into stress tests, transition plans and disclosures. The authors call for systematic integration of physical risk adaptation, including explicit adaptation targets and reflection of adaptation measures in credit risk parameters, and recommend recalibrating proportionality based on vulnerability rather than bank size, plus more harmonised scenario assumptions and modelling approaches across the EU.