EU: ECB updates compendium of good practices for climate and nature related risk management and stress testing

The ECB has updated its compendium of good practices for climate and nature related risk management and stress testing.  This takes the form of two separate reports published on 8^th May 2026:

• The ECB report on good practices for climate and nature-related risk stress testing presents a collection of good practices observed over five years of supervisory activities concerning the integration of banks’ climate and nature-related risk stress-testing capabilities, in particular in light of the expectations set out in the ECB’s 2020 Guide on climate-related and environmental risks. In particular, the report offers support in addressing Expectation 11 of the Guide, which focuses on the necessity to adequately incorporate climate and nature-related risks into banks’ stress-testing frameworks. The report concludes by acknowledging the progress banks have made in stress testing climate and nature-related risks, but also recognises the increasing materiality of these risks, which necessitates further improvements.
• The second report, entitled Good practices for climate and nature risk management – observations from the ECB’s five-year climate and nature risk programme (2020-25) comes in the wake of the ECB having set a deadline for the end of 2024 for institutions to achieve full alignment with its expectations on managing climate and nature risks.  The report shares the ECB’s observations on good practices illustrating different ways in which banks could strengthen their management of climate and nature risks. 

The intention of these reports is to support banks with know-how to close gaps in their risk management frameworks – with the ECXB being in a unique vantage point to observe the practices of a range of different institutions.  The examples outlined in the reports are drawn from a range of approaches already applied by more than 60 different institutions.  With a view to ensuring these reports are also useful for smaller and less exposed banks, the good practice examples are drawn from a range of different levels of sophistication.

It is worth noting that the good practice guides do not have legally binding effect, and do not set supervisory expectations or standards (and as such, good practices are not a prerequisite for banks’ compliance with the applicable legal framework.  “Instead, they are intended to provide a range of illustrative and non-exhaustive examples that banks’ may take inspiration from when building robust C&N risk management capabilities in light of the European Banking Authority (EBA) Guidelines on the management of Environmental, Social and Governance (ESG) risks environmental scenario analysis as well as the ECB Guide on climate and nature-related risks”.  Thus, where a bank has implemented other measures and practices that are more appropriate to its particular risk profile, business model and circumstances, it may be fully compliant without implementing any of the specific examples set out in the reports.

Next steps

Whilst significant strides have been made by banks to build their resilience to climate and nature related risks, there is more to be done (particularly given the increasing materiality of these risks).  This is all the more important in light of views that “the forward-looking nature of these risks – for example non-linear dynamics and compounding events when measuring physical risk – are still not fully understood” – resulting in the risk that such risks may be underestimated within the financial system.    As such, the ECB intends to continue working closely with banks to ensure they are resilient to climate and nature risks, with greater emphasis on the topics of risk underestimation, physical risks and climate and nature risks under heightened uncertainty to ensure resilience. 

A closer look at the reports 

Good practices for climate and nature risk management

This version of the report reflects the progress banks have made since 2022.  the additional detail therein is in response to requests from banks for more detailed insights into how others have designed specific risk management processes and procedures for climate and nature related risks and how they have addressed some of the challenges relating to such risks. Most of the newly added good practices concern nature risks - this report is aiming to make a significant contribution in this area, given that methodologies and approaches are still in their infancy. Other significant additions relate to prudential transition planning, physical risks and managing reputational and litigation risks.

ECB report on good practices for climate and nature-related risk stress testing:

There is recognition that climate stress testing exercises have emerged as a key tool for supervisors to assess the impact of climate and nature related risks on the banking system – with banks themselves increasingly using stress testing to inform required disclosures and strategic choices as part of their climate related risk management. Key areas of the report to take note of are:

• Chapter 3 which examines advanced approaches to internal climate stress testing frameworks, specifically regarding scope, scenario selection and balance sheet assumptions.
• Chapter 4 which describes advanced methods for collecting climate-relevant data and the development of proxies, covering sector allocation, geolocation of counterparties and collateral, GHG emissions and EPC data (this chapter is largely unchanged from the previous 2022 version of the report)
• Chapter 5 which illustrates good practices for integrating climate-related risks into credit risk models, focusing on:
  • transmission channels
  • transition risk
  • physical risk
  • nature related risk
  • long term scenarios
  • risk mitigants

the physical risk and nature related risk sections are entirely new.  The physical risk section reflects on banks progress in this area.  Methodologies for nature related risk stress testing and scenario analysis are still developing – this section highlights emerging approaches to incorporating such risks into stress testing frameworks.