After several years of issuing guidance and repeatedly calling on banks to take climate and environmental risk management seriously, the European Central Bank (ECB) is moving from guidance and expectations to enforcement.
In November 2025, it issued its first-ever periodic penalty payment against a major bank which had failed to sufficiently assess and document the materiality of its climate-related and environmental risks before the ECB’s deadline. The central bank is also reported to be preparing a fine for a second bank.
At a time when the Federal Reserve and other US regulators are rolling back on climate risk policies, the ECB is doubling down. In January 2026, as part of its mandate to keep banks safe and sound, it fully embedded climate- and nature-related risks into its core supervisory and monetary policy functions, while also striving to strengthen its analytical tools, data systems and supervisory oversight to address the material risks that climate change and other environmental issues (such as biodiversity and nature) pose to banks.
How did this shift come into being? And what are the broader consequences for the European banking industry?
The emergence of a robust ‘green’ supervisor
The mid-to-late 2010s saw a flurry of major sustainability-related initiatives, policies and treaties. From the Paris Agreement and the UN Sustainable Development Goals to the European Green Deal, it seemed that sustainability in a holistic sense was the new norm.
The ECB was definitely taking note. In 2020, it published its non-binding guide on climate-related and environmental risks, outlining supervisory expectations without demanding any action. A year later, it conducted an economy-wide stress test involving four million firms worldwide and 1,600 eurozone banks.
The conclusion was clear: an early green transition would bring several medium-to-long term benefits, whereas delayed action could result in severe physical losses over time. The ECB was signalling that it was starting to take climate and environmental-related risks, and their potential impact on macro-financial stability, seriously.
The shift accelerated in 2022. After a landmark climate risk stress test among the significant institutions it directly supervises, the ECB released a report on good practices for climate stress testing, which among other things helped banks to integrate climate-related risks into their stress testing frameworks and address data gaps.
Consequently, in March 2023 the ECB issued binding supervisory decisions to 28 banks that had not managed to align with supervisory expectations regarding the identification and management of climate-related and environmental risks, warning that a failure to address shortcomings would trigger periodic penalty payments. The message was clear: banks can no longer afford to drag their feet on climate and environmental-related risk management.
2024 marked the transitional year, the bridge between guidance and enforcement. Fine notices began to be issued, deadlines crystallised, and the tone of ECB board members shifted from persuasion to accountability.
Research published in July 2024 by the ECB suggested that supervised banks had begun to improve their climate-related and environmental risk management practices, although issues related to environmental data availability remained.
All of these supervisory developments culminated in the fine. After years of leniency and providing guidance, the ECB demonstrated that its supervisory tools were active, and its patience limited.
Holding the line against sustainability rollback
While this supervisory momentum was growing, sustainability regulations in the EU faced significant setbacks last year as political and economic pressures pushed European policymakers to make a U-turn on sustainability in favour of cutting administrative burdens and compliance costs for businesses, ostensibly in the name of competitiveness.
Introduced early in 2025 by the European Commission, the omnibus package sought to drastically reduce the scope of flagship laws such as the corporate sustainability reporting directive (CSRD) and the corporate sustainability due diligence directive (CSDDD), raising thresholds for companies to be included in its scope and delaying implementation timelines.
The ECB did not stand idly by. It issued an opinion explicitly warning that the proposed changes and the reduction of in-scope companies could drastically reduce the availability of sustainability information and ultimately “mask climate-related financial risk.”
In a letter responding to a group of MEPs, ECB president Christine Lagarde reiterated the fact that the omnibus proposal “has significant implications for the Eurosystem”. Lagarge also noted that the proposed reduction of the CSRD’s scope may affect the ECB’s planned climate-related measures, and weaken the Eurosystem’s “ability to perform granular assessment of climate-related financial risks on its balance sheet and within its collateral framework”.
Despite these warnings, the omnibus package was eventually passed in December 2025, effectively defanging the CSRD and CSDDD before the two directives had a chance to even make any impact. Financial institutions – which had long called for better availability of high quality sustainability data to make more informed investment and lending decisions – were left on the hook.
Finding opportunities amidst the ECB’s expectations
Regardless of omnibus-related developments, the ECB continues to act out its prudential obligations. In a November 2025 publication, researchers from the ECB underlined the importance of maintaining strong CSRD disclosure obligations, particularly when it comes to companies’ exposure to climate and nature risks. The authors describe nature degradation and biodiversity loss as increasingly recognised financial risks and note that Eurosystem in-house credit assessment systems consider these risks when deemed credit relevant.
Even if the size of the fine – just €187,650 – can be seen as symbolic, it signals that the ECB is serious about the potential disruptions that can come from climate and environmental risks.
This raises a question for banks: how should they respond? One option is defensive – in other words, banks can continue to treat climate-related and environmental risk management supervision as a compliance burden and do the bare minimum to avoid the fines. The other is strategic, which entails working with clients to retrieve accurate sustainability data, and incorporating climate-related and environmental risks within a broader transformation of the banking business model.
The latter approach requires banks to strengthen data infrastructures and client relationships, refine credit risk models, and integrate climate- and nature-risk scenarios into operational risk frameworks and the overall business strategy. This would be key to re-evaluating exposures across sectors vulnerable to climate-related and environmental shocks while finding areas where green growth opportunities exist. As losses and opportunities derived from climate-related and environmental risks become increasingly measurable, this approach becomes essential for long-term business success.
Recent regulatory developments reinforce this trajectory. The European Banking Authority’s guidelines on management of ESG risks requires banks to embed them into their overall risk management framework and to consider these risks as they would consider traditional financial risk drivers, such as credit or market risks. Moreover, they will need to identify, measure, manage and monitor ESG risks through robust data processes and forward-looking methodologies such as scenario analysis and stress testing.
Beyond risk management, the proposed updated version of the sustainable finance disclosure regulation (otherwise known as SFDR 2.0) imposes clearer and stricter sustainability disclosure requirements. The trickle-down effect for European banks into their services and client relationships is expected to be material and will need to be managed carefully from the existing system with complex sustainability preferences to a potential more streamlined approach facilitating client interactions – a long road ahead.
Irrespective of the political and regulatory landscape, in this fast-changing world European banks are well advised to accelerate the systematic integration of sustainability risks into capital allocation decisions, product strategy and credit risk scoring. Differentiated stress testing scenarios need to include “green swan” or “Minsky-type” events that consider a sudden reassessment of the value of real assets due to changing insights from climate science or tipping points occurring, which can lead to sudden repricing of financial assets.
After all, Europe is the fastest warming continent and will not be immune to the rapid encroachment of climate impacts or the subsequent financial shocks.
This page was last updated February 11, 2026
Written by
Michael Horvath is a partner at PwC Luxembourg, leading the company's sustainability services. He has a financial regulatory remit, as well as an advisory background and significant experience leading projects in the asset management industry. He is also a certified public accountant in Switzerland and Liechtenstein.
