• Sustainability factors are becoming financially material and increasingly relevant for risk management and strategy.

• Short-term decision-making can obscure long-term systemic climate and biodiversity risks.

• Real-world disruptions already demonstrate the economic impact of environmental risks across sectors.

• Integrating sustainability into portfolio allocation and performance metrics supports long-term resilience.

As physical climate risks increasingly influence asset values and financial stability, adaptation and resilience are moving to the forefront of sustainable finance. Ahead of CeFPro’s Sustainable Finance Europe conference in London this February, Michael de Smet shares his perspective on how banks are responding to these risks and why resilience must now be treated as a core financial consideration alongside mitigation.

How can sustainability be reframed from a compliance or reporting exercise into a core risk management tool that strengthens financial decision-making? 

As data and analytical tools for sustainability‑related risks mature, the financial relevance of environmental and social factors is becoming increasingly evident. These considerations are therefore evolving beyond reporting or box‑ticking and are now informing risk management and strategic decision‑making. For example, the growing frequency and severity of extreme weather events – driven by climate change – continue to generate substantial economic losses, eroding asset values, and prompting regulatory and market reactions. To build robust portfolios, investors can incorporate both climate mitigation and adaptation considerations into portfolio management. At the National Bank of Belgium, this approach is reflected for instance in our portfolio decarbonisation targets.

What are the dangers of short-term cost-cutting approaches that ignore climate and biodiversity risks, and how can financial leaders better account for long-term systemic risks? 

Gaps in data and cognitive biases, such as recency bias, can drive decisions that may appear beneficial in the short term but fail to capture longer‑term systemic vulnerabilities. To better incorporate long‑term systemic risks, organisations must strengthen their analytical and operational readiness, including through adaptation measures. For investors, this includes improving data availability and quality, updating risk‑assessment tools, and embedding sustainability considerations directly into portfolio management practices. The National Bank of Belgium has a dedicated labelled bond portfolio, buying green bonds which finance adaptation expenditures. 

What real-world examples have you seen where climate or biodiversity risks are already disrupting industries, supply chains, or asset values and what lessons should the finance sector take from these disruptions? 

Climate change is already disrupting various sectors through adverse weather impacts. The European Commission’s latest agricultural outlook highlights that EU production of olives, apples and dairy products – among others – is already being negatively affected. Floods, storms and wildfires increasingly damage energy infrastructure, while droughts can impair transport routes, as seen with low water levels on the Rhine. The Bank for International Settlements for instance found that the negative effects of weather disasters on GDP can be quite sizeable and long-lived, including -2% and -0.4% after average-sized droughts and wildfires, respectively, over four years. These disruptions show that environmental risks are not hypothetical – they are financially material today. The implication for investors is clear: proactively investigate these risks and their implications for your portfolios and mitigate them accordingly to avoid potential valuation and liquidity shocks later on.

How are forward-looking businesses embedding long-term resilience into their financial strategies, and what practical steps can others take to follow their lead? 

Long‑term resilience requires both organisational awareness and a future‑proof framework. The National Bank of Belgium has integrated sustainability as a fourth pillar in its strategic asset allocation policy – alongside liquidity, safety and return. In line with this, the Bank published its Sustainable and Responsible Investment Charter, which informs and guides the management of its non‑monetary policy portfolios. The charter addresses ESG‑related risks and supports the broader transition to a sustainable and inclusive net‑zero economy. By embedding long‑term commitments – such as a 2050 net‑zero target for the aggregate portfolio – the charter helps the National Bank of Belgium take decisions that favour resilience and long‑term value creation.

In the future of sustainable finance, how might traditional measures of financial performance need to change to better reflect long-term value creation and resilience?

To capture long‑term value creation, performance measurement could expand to include indicators with longer time horizons and material sustainability factors – both financial and non-financial ones. Longer‑term metrics encourage investment decisions aimed at resilience rather than short‑term returns, while sustainability-related indicators enrich decision‑making by incorporating elements such as avoided physical‑risk losses, alignment with transition pathways and exposure to nature‑positive economic activity. As climate change and other global sustainability trends continue to drive asset repricing, extending and updating the existing measurement toolbox will become increasingly important.