© Consumers Energy
As evidence emerges that the European Central Bank (ECB) has substantially underestimated the cost of physical climate risks, a new report from the Network for Greening the Financial System (NGFS) unpacks various green monetary policy options available to central banks. Meanwhile, eight African regulators have rapidly progressed on operationalising global sustainability reporting standards.
NGFS unpacks policy options for greening monetary policy
A new NGFS report proposes central banks consider climate factors on both sides of their balance sheets to manage risks more effectively across monetary policy cycles.
The group’s past work focused mainly on adjusting collateral frameworks and tilting asset purchases towards lower-carbon borrowers. However, this paper argues the effectiveness of such asset-side measures may be limited by their cyclical nature. Central banks with relevant mandates may benefit from liability-side tools, such as incorporating climate factors into reserve requirements or short-term debt issuance.
According to the NGFS, these instruments “can effectively complement current greening practices covering credit, collateral and asset purchase policies” by maintaining consistent incentives throughout monetary cycles.
The toolkit provides cost-benefit analysis of these instruments, discussing operational, legal and market challenges. Where mandates permit such approaches, the NGFS says these measures could help central banks protect balance sheets against climate risks whilst supporting low-carbon capital allocation.
ECB improves datasets, finds physical climate risks significantly underestimated
The ECB has quietly revealed a troubling new insight in a recent blog post: climate-related physical hazards facing European banks have been substantially underestimated. Updated datasets show windstorm losses alone have tripled compared to prior estimates, a sobering recalibration of systemic risk exposure.
The improvements stem from enhanced geographic data and better balance sheet mapping. As the ECB notes, “newly available hazard data” and “more accurately determining their locations and values” of physical assets have transformed risk visibility. The bank now captures exposures to floods, wildfires, heat stress, and water scarcity with granular precision.
The ECB developed new data capturing how inflation affects banks’ carbon intensity metrics, enabling more accurate climate stress testing and supervisory risk assessments.
African nations move faster than peers in adopting ISSB sustainability standards
Eight African countries – Ghana, Kenya, Nigeria, Rwanda, Tanzania, Uganda, Zambia and Zimbabwe – are expected to mandate International Sustainability Standards Board (ISSB) reporting within two years, Responsible Investor reports. This rapid pace of adoption substantially outstrips progress in many other regions, with Morocco the only remaining jurisdiction from the African group still finalising its implementation plan.
Responsible Investor’s ISSB adoption tracker shows that six of these nations have mandated third-party assurance on sustainability disclosures, with most phasing in reasonable assurance within three-to-five years – a safeguard that is conspicuously absent from the EU’s recent omnibus revisions.
Implementation is being led by accountancy and auditing bodies rather than financial regulators, marking a distinctive, profession-led approach. Kenya, Ghana, Nigeria and Rwanda have also established pre-implementation readiness assessments for companies, embedding capacity-building into adoption workflows.
ECB research reveals climate transition risk now priced into bank funding costs
New ECB research demonstrates that banks with greater exposure to climate transition risks face significantly higher borrowing costs in the European repo market, the backbone of bank short-term funding and a core monetary policy transmission channel. This pricing of climate risk carries substantial implications for financial stability.
The study combined transaction-level repo data from 2019–2022 with detailed information on European bank financed emissions. Researchers found a one standard deviation increase in financed emissions translates to 7–12% higher repo rates. The authors say this premium reflects “a combination of a risk premium and inconvenience premium, reflecting sustainability preferences of key dealer banks”.
Notably, the carbon premium intensifies during periods of financial stress, amplifying existing vulnerabilities. Meanwhile, rate segmentation driven by transition risk affects how quickly banks adjust pricing to central bank changes, indicating uneven monetary policy transmission.
WWF warns insurance protection gap leaves economies vulnerable to climate costs
A new WWF white paper warns that “a widening insurance protection gap is exposing households, businesses and governments to escalating financial risks”, with nature loss identified as “an often overlooked but powerful force that amplifies physical climate change risks”. In widespread deforestation areas, the risk of a large-scale flooding event can increase by as much as 700%. As such, protecting nature represents cost-effective preventive measures.
Global disaster losses reached US$2.3tn in 2023 “when indirect costs and ecosystem costs are accounted for”. The insurance gap is acute: $64bn annually (2021–2024) in the US and €59bn in the EU (2021–2023).
Prevention delivers greater value, WWF says. Every dollar spent on climate resilience can save communities up to $13, whilst every £1 invested in flood risk management prevents £8 in damages, including £3 in direct government savings. In Switzerland, protective forests are valued at 4bn Swiss francs annually and up to 25 times more cost-effective than equivalent technical measures.
Research
The changing dynamics in global metal markets: how the energy transition and geofragmentation may disrupt commodity prices
Grantham Institute, London School of Economics
This research shows how supply vulnerability poses material transmission risks for monetary policy and financial stability as critical mineral dependency deepens during the energy transition. Supply inelasticity means demand shocks may drive price pressures, creating inflation risks. However, this elasticity varies per mineral. Nickel prices prove markedly more vulnerable to trade announcement shocks than copper or aluminium, with market-wide revisions between +8.1% and -6.8% when restrictive trade policies are announced.
Biodiversity and productive development: extractivist traps and symbiotic innovation ecosystems in Latin America & the Caribbean
Development Bank of Latin America and the Caribbean
This paper explains that the region must increase annual R&D spending from $35bn to $130bn to escape the middle-income economy trap. The author stresses that innovation that supports biodiversity – rather than extractivist models – offers central banks a pathway to align development finance with long-term natural capital preservation. Though capability-building remains institutionally constrained across biodiverse territories of Latin America and the Caribbean.
This page was last updated January 28, 2026
Written by
Ike Walker, a Green Central Banking contributor since 2023, has a decade's experience in research writing. An Utrecht-based scholar, Ingrid specialises in transformative justice, green finance, law and systems change. They are an Utrecht University's Bright Minds scholar and previously worked for Cambridge University and various justice-based NGOs.
