Irene Heemskerk, head of the ECB's climate centre © ECB
With the Federal Reserve withdrawing from a central bank climate coalition and the political tide turning on green policies in the US, the European Central Bank (ECB) has no intention of backing down on its work around mitigating the risks of climate change, says the head of its specialist unit.
Not only does the ECB have no plans to back out of the Network for Greening the Financial System (NGFS), a coalition of central banks founded to discuss how the financial system can address climate change, but addressing climate change risk remains a core part of its mandate, said Irene Heemskerk, head of the ECB’s climate change centre.
“The ECB is there and the ECB is there to stay,” she said.
The ECB’s work on green policies, including its work with the NGFS, has helped the EU and member countries score in the top four positions in the Green Central Banking Scorecard. In contrast, the US ranked near the bottom of G20 countries and since then, the Fed and US Treasury Department have left the NGFS.
Fed chair Jerome Powell said the central bank’s departure was not politically motivated, but was a response to the coalition’s work broadening beyond the remit of the Fed, citing the NGFS’s work around nature related risk and biodiversity.
Like the NGFS, Heemskerk regrets the Fed has left but respects its decision to leave. The NGFS has grown from eight members to over 140, with awareness of the effects of climate change on the economy growing immensely among regulators since it was founded in 2017, Heemskerk said.
Green policies around climate change risk are not a “nice to have” but a necessity, she added.
“Green and competitiveness go hand in hand. There’s no trade-off between them because you’re preparing yourself for what’s to come, and also making your economy more resilient going forward”.
Although governments and policymakers need to decide how the economy transitions, Heemskerk said the ECB still needs to deal with the physical impact of climate change. That means reacting to the increased frequency of climate disasters, and ECB research has shown that a longer transition period would be costlier.
“We have to make sure that we protect what we have built. So we have to make sure that we don’t backtrack on any actions that we have taken,” she said.
How the ECB approaches climate change risk
Climate change is a material risk and transition plans can help banks manage that risk, said Heemskerk.
“We’ve seen [climate change] as a material risk that banks need to manage. So it’s not that we’re saying you should invest in green or you should not invest … It’s something you have to be aware of and you have to manage,” she said.
The ECB considers climate change to be part of its primary and secondary objectives. Like many central banks, its first duty is to maintain price stability, while its secondary objective is to support the EU’s policies, which include measures like the set of net-zero policies known as the European Green Deal.
Climate change and the transition to a green economy are likely to have an impact on the economy. Research from the NGFS found that climate change could lead to a decline in global economic growth.
“If we ignore the impacts on the economy and the risk for climate change, we will fall short in fulfilling our mandate,” Heemskerk said.
Because climate change is a risk to the financial system, the ECB asked banks to factor in climate risk with how they do business, an ongoing process that has taken several years. Banks that failed to meet interim deadlines by the end of December 2024 may face potential penalty payments.
While the ECB was one of the first central banks to say it would penalise banks over climate-related goals, those penalty payments are not unique to climate but are part of a larger central bank development for using its supervisory toolkit, said Heemskerk.
“Climate is one of the first areas that we’ve been applying it’ ,” she said.
The ECB asked banks to perform a material assessment on the impact of climate and nature-related risks in March 2023 and found that while a lot of progress was made across different types of financial institutions, improvements were needed. As a result, the ECB issued decisions to 28 banks, of which 22 were tied to a periodic penalty payment – daily fines that could amount to 5% of daily average revenue. Most banks managed to address the requirements and those that have not are still being assessed to see if the penalties will be charged.
Good practices around climate risk mitigation were found in all types of banks, both larger and local, smaller institutions, which “shows for us that it can be done”. The ECB is also looking at updating its good practices to give better guidance to banks on how to mitigate climate change risk.
The ECB’s supervisory priorities for the next two years include aligning climate and environmental risk to supervisory expectations, such as transition plans. Heemskerk said she is a big fan of transition plans, as they can help banks not only understand the goals and actions needed right now, but how they can work with clients to understand and mitigate risk, such as understanding if mortgaged homes are energy efficient and safe from potential natural disasters.
“It doesn’t mean that you have to cut down all your carbon-intensive investments now, but you have to know where it is and where it goes. And it also can mean that you might want to invest in a company that, at the moment, is still heavily polluting, but … are there plans going forward to minimise that [risk], how are you taking action, and do you have enough buffer to account for that?”
Difficulties in measuring nature risk
Although a lot of focus is on climate change risk and hitting net-zero targets, it is not the only area of risk when it comes to the environment. Nature risk is one area that both the ECB and the NGFS have been researching, as it is intertwined with climate change.
“We saw that this is a topic we need to know more about and understand better where the impact comes from and the financial risk [that] can develop,” Heemskerk said.
Understanding nature risk is trickier. ECB research has found that 75% of banks are highly dependent on nature, but it plans to go deeper and understand how risks could materialise from threats to nature and the environment, said Heemskerk.
The ECB is working on developing a climate-nature scenario framework and has partnered with other researchers to determine how it can be done. While progress has been made by banks on managing climate risks, the next step is understanding the financial and economic risks from nature and biodiversity loss.
But one of the biggest challenges, both in climate and nature loss risk projections, is data. A lot of data is missing, as nature is such a broad area and central banks need to try to understand where the risks from nature actually come from, said Heemskerk.
Many economic models also rely on historical data, which can be misleading when analysing something like climate change that has no precedent. The increase in extreme weather, for example, is not accounted for in historical numbers, nor are the impacts of tipping points, which can make it “cumbersome” to really estimate economic loss from climate and nature loss, said Heemskerk.
“In general, I think we just have to be aware of every financial decision anyone makes, or any system makes, [and ask] am I dependent on nature? What is my impact and how can I account for that in any decision that I make further?”
This page was last updated February 4, 2025
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
