• Climate risk should be managed as a core financial risk affecting borrower viability, asset quality, collateral values and broader financial stability.
• Risk appetite frameworks need explicit climate-related exposure limits, sector analysis and monitoring of transition-sensitive or potentially stranded assets.
• Governance should span treasury, risk and business teams, with clear accountability beyond sustainability functions alone.
• Capital allocation and funding strategies will increasingly favour resilient clients, credible transition plans and bankable green investment opportunities.
• Institutions should prepare for evolving regulation through stronger climate data, disclosure, capital frameworks and adaptable transition planning capabilities

Ahead of Balance Sheet Management Europe, we spoke with Libor Krkoska about how climate risk is reshaping the priorities of financial institutions. In this interview, he explores how banks can embed climate considerations into balance sheet planning, strengthen governance and risk appetite frameworks, and position themselves for the regulatory, funding and capital allocation challenges ahead.

How should organisations be integrating climate risk into balance sheet planning, particularly in relation to capital adequacy, liquidity, credit quality, and collateral valuation?

Climate risk should be treated as a core financial risk and integrated into balance sheet planning in the same way as credit quality or liquidity. This means assessing both transition risks, such as policy changes, carbon pricing and technology shifts, and physical risks, including heat, flooding and other climate related disruptions. These risks can affect borrower viability, collateral values, insurance availability and broader financial stability. Institutions should therefore strengthen climate related risk assessment, improve data and disclosure, and embed these considerations into credit analysis, portfolio monitoring and capital planning.

How should institutions better align their risk appetite framework with climate-related exposures, and what steps are most integral to take in order to manage concentration risks in high-transition or potentially stranded asset sectors?

Risk appetite frameworks should explicitly capture climate related exposures, particularly in carbon intensive, hard to abate or otherwise transition sensitive sectors. Institutions need to understand how regulation, market demand, carbon pricing, supply chain pressures and technology change could affect client competitiveness and credit quality. Transition plans are a useful tool in this context: they help assess whether clients have credible pathways to adapt their business models, manage risks and identify investment needs. For concentration risks, institutions should combine sector level analysis with portfolio monitoring, clear exposure limits where appropriate, and proactive engagement with clients whose assets may face declining value or reduced market access.

What governance structures should be in place to manage climate risk across treasury, risk, and business functions, and where do you see gaps in ownership or accountability today?

Effective governance requires climate risk to be embedded across strategy, risk management, business planning, disclosure and investment decision making. It should not sit only with sustainability teams. Treasury, risk and business functions each have a role: treasury in funding and liquidity implications, risk in integrating climate factors into the risk appetite and credit processes, and business teams in client engagement and origination of bankable green investments. The EBRD’s approach highlights transition planning at client level, covering governance, strategy, metrics and targets, risk management and disclosure. The main gap is often fragmented ownership of climate risks, where climate risk is recognised but not yet fully embedded in mainstream credit analysis, monitoring and accountability structures.

Looking ahead, how do you expect climate risk to influence capital allocation decisions, funding strategy, and long-term balance sheet resilience?

Climate risk will increasingly influence both the cost and direction of capital. Institutions will need to allocate more capital towards clients, sectors and infrastructure that are resilient, competitive and aligned with the green transition, while managing exposure to activities facing higher transition or physical risks. The scale of investment required is significant: green related financial needs in the EBRD regions are projected to rise to more than €500 billion by 2030. This creates both risk and opportunity. Institutions that can identify bankable green projects, support adaptation and resilience, and mobilise private capital will be better positioned to protect asset quality, diversify funding sources and strengthen long-term balance sheet resilience.

As regulatory expectations evolve—including potential carbon-linked capital charges and enhanced disclosure requirements—how should institutions be preparing to adapt frameworks and demonstrate compliance while maintaining strategic flexibility?

Institutions should invest now in the capabilities that will allow them to respond credibly to evolving regulation: better climate data, stronger disclosure, integration of climate related financial risk into credit and capital frameworks, and practical transition planning. Regulatory and investor expectations are already pushing financial institutions to assess environmental risks more systematically and disclose sustainability related information. At the same time, frameworks need to remain flexible, as policy pathways, technologies and client needs will continue to evolve. The priority is to build systems that support compliance, but also enable institutions to identify opportunities, develop green finance products and adjust capital allocation as markets and regulation change.