European Central Bank Banking Supervision has published an updated report setting out illustrative good practices for banks’ climate and nature-related risk stress testing, based on lessons from its 2022 climate risk stress test and follow-up work conducted between 2023 and 2025. The report says all significant institutions had integrated climate risk into their stress-testing frameworks by the end of 2024, up from 41% in 2022, but it also finds that material risk drivers, relevant portfolios and key transmission channels are still sometimes missed and that modelling approaches need to become more robust. The compendium is intended to help banks strengthen stress-testing capabilities in light of the ECB Guide on climate-related and environmental risks and the European Banking Authority Guidelines on environmental scenario analysis, and it does not create new legal or regulatory requirements. The 2026 update focuses mainly on how banks integrate climate risk into credit risk stress-testing models. It adds new sections on physical risk modelling and emerging approaches for incorporating nature-related risks, while leaving the chapter on climate-related data largely unchanged because the update was not based on a new data collection exercise. The report highlights observed practices on defining the scope of stress-testing frameworks through materiality assessments, using both physical and transition scenarios, combining static and dynamic balance sheet approaches, and integrating climate variables into probability of default and loss given default models with increasing use of counterparty-level analysis. It also notes persistent challenges in obtaining greenhouse gas emissions data and energy performance certificate data, although some banks are mitigating gaps through direct client engagement, external providers, proxies and proprietary indicators. The European Banking Authority Guidelines on environmental scenario analysis will apply from 1 January 2027. The report also states that the European Central Bank, together with the European Banking Authority and EU national central banks and supervisory authorities, is developing a framework to incorporate climate risks into regulatory stress testing, with both transition and physical risks to be integrated into the EU-wide stress test in line with the Joint Guidelines on ESG stress testing that apply from 1 January 2027.
European Central Bank - Banking Supervision 2026-05-08
European Central Bank Banking Supervision updates climate and nature risk stress testing good practices with new physical and nature risk modelling examples
The European Central Bank Banking Supervision has updated its report on good practices for banks’ climate and nature-related risk stress testing. By end-2024, all significant institutions had integrated climate risk into stress-testing frameworks, but key risk drivers, portfolios and transmission channels are still sometimes missed and modelling remains insufficiently robust. The 2026 update focuses on integrating climate risk into credit risk models, adds sections on physical and emerging nature-related risks, and highlights data gaps, especially for greenhouse gas emissions and energy performance certificates. The report supports implementation of the ECB Guide on climate and environmental risks and the EBA Guidelines on environmental scenario analysis and ESG stress testing, effective 1 January 2027, without introducing new legal or regulatory requirements.