• ECB Executive Board member Frank Elderson warned that climate change and biodiversity loss are becoming systemic financial risks
• The ECB is expanding its assessment of banks' exposure to deteriorating ecosystem services
• New analysis will examine how ecosystem degradation could translate into credit losses across the eurozone banking sector
• Elderson said nature-related risks affect credit risk, inflation, growth and long-term financial stability
• The ECB expects banks to strengthen governance and risk management for climate and nature-related exposures
• Political support for climate-focused financial regulation has become more fragmented internationally, but the ECB says European banks increasingly recognise the financial implications



The European Central Bank is intensifying its scrutiny of climate and nature-related financial risks after a senior policymaker warned that the accelerating degradation of ecosystems is emerging as a growing threat to economic resilience, financial stability and the banking sector.

Frank Elderson, a member of the ECB's Executive Board and one of the central bank's leading voices on climate risk, said environmental degradation is no longer solely an ecological concern but a material financial issue capable of affecting credit quality, inflation, economic growth and the stability of the financial system.

His comments come as Europe continues to experience increasingly severe heatwaves and wildfires that have caused widespread damage to communities, businesses and infrastructure.

The ECB has been steadily integrating climate considerations into its supervisory framework over recent years.

It is now broadening that work to examine the financial implications of deteriorating "ecosystem services" – the natural processes and resources that underpin economic activity, including clean water, fertile soils, pollination, forestry, fisheries and flood protection.

"These services are not stable but they are in rapid decline. That's why we talk about the climate and nature crises," Elderson said. "Knowing that dependency, and knowing those exposures by the banks, we come to the conclusion that this is relevant."

Unlike individual weather events, nature-related risks are often interconnected and accumulate over time, making them significantly more difficult to identify and quantify.

The ECB believes understanding these dependencies will become increasingly important as financial institutions seek to assess the long-term resilience of their loan portfolios and investment exposures.

The central bank is preparing further analysis later this year examining how the degradation of ecosystems could translate into credit losses across the eurozone banking sector.

The work forms part of a broader supervisory programme designed to improve understanding of how environmental risks may be transmitted through the financial system.

Elderson argued that the economic consequences extend well beyond environmental policy, touching the fundamental drivers of prosperity and financial stability.

"Nature-related risks can pose material economic and financial risks, including through their impacts on credit risk, growth, inflation and – over the long term – potential financial instability," he said.

He dismissed suggestions that the issue is primarily ideological, arguing that protecting natural capital is central to sound economic management.

"If you destroy nature, you destroy the core on which our economies depend," Elderson said. "This is not some kind of a flower-power, tree-hugging exercise. This is core economics. This is core financial stability, core price stability."

As the ECB continues to supervise the eurozone's largest banks, institutions are increasingly expected to identify, measure and manage both climate and nature-related financial risks within their governance, risk management and strategic planning frameworks.

Supervisors have repeatedly warned that firms failing to make sufficient progress could face escalating supervisory action.

Elderson was a founding architect of the Network for Greening the Financial System, established in 2017 alongside former Bank of England Governor Mark Carney and Banque de France Governor François Villeroy de Galhau.

The network has since grown into a global coalition of central banks and financial supervisors working to strengthen climate risk management across the financial sector.

Political support for climate-focused financial regulation has become more fragmented internationally.

The United States withdrew from the Network for Greening the Financial System during the Trump administration, placing greater emphasis on European regulators to continue advancing climate and nature-related supervisory initiatives.

Despite that shift, Elderson said European banks increasingly recognise that environmental risks have become inseparable from financial risk.

"I would think it's very difficult to find a bank in Europe that will honestly tell you that they think this is not relevant," he said. "I think that time has passed."