Banks facing climate and nature risks: towards strengthened expectations

Chart 1: Developments in banking supervision in response to climate and environmental risks (2020–26)

In all their activities, from business to housing loans, banks are exposed to the financial impacts of physical risks (such as floods and droughts) and transition risks (such as the energy performance of buildings they hold as collateral). Given this financial stability challenge, which exists alongside the funding requirements necessary for the ecological transition, the entry into force in April 2026 of the French transposition of the EU Capital Requirements Directive (CRD6) marks the final stage in the gradual integration of climate and environmental (C&E) risks into the prudential framework applicable to French banks. 

Forward-looking tools for analysing the impact of climate risks on financial stability 

In response to the persistent increase in climate-related risks, central banks and supervisors have developed tools to estimate the long-term effects of climate shocks on the macroeconomic outlook, and the short-term consequences for the stability of the financial system and the solvency of credit institutions. 

The long-term scenarios of the Network for Greening the Financial System (NGFS) suggest a significant decline in global GDP by 2050. These macroeconomic losses reflect both the increasing severity of physical risks and the adjustment costs associated with a disorderly transition. In the shorter term, the scenarios published in 2025 show that a potential succession of extreme weather events would lead to substantial losses in GDP in the affected regions, amounting to as much as 7.4% over a single year in France if there were a combination of heatwaves, droughts and forest fires across the continent (see Champey and Gosset, 2026). More specifically, these developments could result, in particular, in a marked increase in the probability of default by some of their counterparties. 

Stress tests for the financial sector are the main prudential tool for quantifying these risks, and have developed significantly since the ACPR pilot exercise carried out in 2020. More recently, the “Fit-for-55” stress test, carried out in 2024 by the European Central Bank (ECB) in coordination with several European authorities, quantifies the impact of a sudden spike in economic agents’ sensitivity to transition risk (“run-on-brown”), paving the way for the 55% reduction in greenhouse gas emissions by 2030. Under the second adverse scenario (a combination of the “run-on-brown” shock with wider macroeconomic and geopolitical stress factors), the report estimates the additional losses at EUR 50 billion for the banking sector (representing 0.9% of exposures), and EUR 518 billion for the financial system as a whole (2.1% of exposures) between 2023 and 2030, compared with the baseline scenario. 

At this stage, this work focuses primarily on climate risks in the strict sense and therefore represents a conservative estimate of environmental risks. More recently, central banks and supervisors have begun work on a broader range of financial risks linked to nature degradation, notably through the development of the NGFS’s conceptual framework in 2024. In France, the initial quantification attempts efforts conducted out since 2021 are expected to be progressively refined, with the launch in July 2026 of the "Modelling Economic and Financial Risks Related to Nature" research chair. 

Stronger supervision has led to an improvement in banks’ risk management practices 

Having formally defined their supervisory expectations, the ECB and the ACPR carried out thematic reviews, with the ECB’s review resulting in possible financial sanctions in the event of non-compliance with the requirements. 

Supervisory authorities have gradually tightened their requirements regarding climate and environmental (C&E) risk management. The ACPR paved the way by publishing a guide to good practices for banks in this area. Shortly after, in 2020, the ECB clarified its expectations by publishing a guide dedicated to transparency and the integration of C&E risks into risk management frameworks. 

In order to ensure that its recommendations are implemented, the ECB conducted a thematic review of C&E risks between 2022 and 2024 for the most significant institutions, assessing their practices in terms of strategy, governance and integration into risk management. This review, coupled with potential sanctions, has led to significant progress: whilst in 2022, no major French bank had "advanced" practices, more than a third were deemed to have such practices by the end of 2024 (Chart 2). For instance, some institutions have developed a classification system for their counterparties based on the impact of climate risk on their credit risk, taking into account their CO₂ emissions profile, their sensitivity to risks (sectoral and geographical approaches) and their capacity to adapt. To round out these efforts, between 2023 and 2025 the ACPR conducted three similar thematic reviews of smaller French institutions, primarily for educational purposes. 

Chart 2: Overall assessment of C&E risk management at the 10 largest French banks (2022–24)

Note: The joint ECB/ACPR supervisory teams assessed the robustness of practices (defined as the existence and quality of practices in relation to the supervisor’s expectations) by classifying them into four levels, ranging from “insufficient practices” to ”advanced practices” 

However, this general improvement does not mean that all French banks have achieved a fully satisfactory level of C&E risk management. Progress does indeed appear to be uneven depending on risk categories, particularly credit risk (Chart 3). In 2025-26, the ECB noted that certain institutions had fallen behind in their risk assessments, leading it to impose financial sanctions for the period in which the banks failed to meet their obligations. Such decisions, which were disclosed by the ECB, were imposed on two institutions in Europe. Sanctions may amount to up to 5% of the bank’s average daily turnover over a maximum period of six months. 

Chart 3: Assessment of C&E risk management at the 10 largest French banks for two risk categories (2022–24)

Note: (left-hand side), in 2024, more than half of France’s major banks had implemented advanced practices to integrate climate and environmental risks into their short-, medium- and long-term strategies, for example by defining measurable indicators such as the carbon footprint of their assets (see Chart 2 for the scale). 

With the entry into force of CRD6, full integration into the European prudential framework 

At the regulatory level, the European co-legislators first sought to improve the quality and availability of climate data, before strengthening the prudential supervision provisions (Pillar 2), which will move into a new phase in 2026 with the entry into force of CRD6. 

First, prudential regulations (the CRR Regulation) have strengthened the non-financial information disclosure framework, which falls under Pillar 3. These provisions, which have been in force since 2021, require large European banks to disclose information regarding their exposure to physical risks (for example, exposures subject to acute climate-related hazards) and transition risks (such as the breakdown of their property collateral according to energy performance ratings). More recently, as part of the “Omnibus” project launched by the European Commission, the requirements for companies to disclose non-financial information – which banks use for their own disclosures – are currently being reviewed with a view to streamlining them and focusing efforts on the most essential data points. 

Subsequently, the environmental, social and governance (ESG) risk management framework gradually developed, leading to institution-specific prudential requirements set by the supervisor (Pillar 2). With effect from April 2026, the transposition of the CRD6 Directive into French law represents real progress, insofar as it introduces an obligation for banks to draw up a prudential transition plan setting out how they identify, assess and manage their ESG risks. The directive also strengthens the supervisor’s powers, enabling them to demand adjustments to governance and ESG risk management processes, as well as changes to the targets, measures and actions set out in these transition plans. 

CRD6 thus constitutes a landmark development, providing a solid legal basis for supervisors’ treatment of the C&E risks facing banks.