Speaking at the ECB-Bank of England Conference in Frankfurt on 14 October 2026, Frank Elderson, Member of the ECB Executive Board, addressed the challenges of managing climate and nature (C&N) risks in an increasingly non-linear and uncertain financial landscape. Elderson noted that while banks have made strides in quantifying direct damages, significant gaps remain in how these risks are integrated into core risk models and capital planning.
A critical data point highlighted by Elderson is the ongoing exposure of the banking sector to high-emission industries. Since 2022, the average share of interest income earned from carbon-intensive sectors by significant supervised banks has remained consistently above 70%. This indicates a substantial level of financial interconnectedness with sectors central to the climate transition.
Despite the availability of better climate hazard and geo-location data, which allows for improved modeling of metrics like loss given default (LGD) during droughts or flooding, the depth of risk integration is limited. Elderson pointed out that current climate stress tests and scenario analysis exercises only cover all the risk drivers that banks themselves deem material in approximately 15% of cases.
Elderson emphasized that while the Network for Greening the Financial System (NGFS) scenarios have provided a global reference point for consistent quantification, they are not a substitute for expert judgment. He cautioned against 'scenario tunnel vision,' where capital planning becomes anchored to a narrow set of narratives rather than exploring extreme yet plausible conditions.
The speech also touched upon the limitations of current scientific and financial modeling. For instance, Elderson noted that many global climate models do not directly represent feedback loops such as abrupt permafrost thaw, which research suggests could add as much as 0.6°C in adverse scenarios. He urged banks to move beyond 'box-ticking' exercises and ensure that scenarios are applied and challenged to account for these non-linearities.