The Global Risks Alliance (GRA)
Climate change and nature loss reach banks through their borrowers, their collateral and the markets they depend on. Physical damage lowers property values and firm income, the transition to a low-carbon economy reprices emissions-intensive assets, and degraded ecosystems weaken the businesses that rely on them. This page explains how these drivers become credit, market, liquidity and operational risk across short, medium and long horizons, and how scenario analysis is used despite deep uncertainty.
GRA · Established · service level R0
Climate risk in banking is the risk that climate change and nature loss cause losses through a bank's borrowers, collateral and markets. Physical damage lowers property values and firm income, the low-carbon transition reprices emissions-intensive assets, and degraded ecosystems weaken the firms that depend on them. Supervisors test it with scenarios such as those of the NGFS.
How physical and transition risk could reach a loan book under different scenarios. Illustrative design values.
Financial exposure across horizons. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
Floods, storms, heat and drought damage property and disrupt production. Uninsured losses fall on borrowers, raising default probabilities and loss given default, and insurance withdrawal can reprice whole regional mortgage books.
Carbon pricing, regulation, technology and shifting demand can strand assets and squeeze the margins of emissions-intensive borrowers. Timing matters: a late and abrupt transition produces sharper losses than an orderly one.
Agriculture, fisheries, water-intensive industry and tourism depend on ecosystem services. Degraded soils, water and pollination can weaken borrower cash flows in ways current credit models rarely capture.
Physical and transition shocks interact with each other and with the macroeconomic cycle. Correlated losses across sectors and regions can coincide with market repricing, testing capital and liquidity together.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Financed emissions | Greenhouse gas emissions attributed to a bank's loans and investments, measured with the PCAF standard. |
| Climate scenario analysis | Assessing a portfolio's performance under plausible climate and policy pathways rather than a forecast. |
| Green asset ratio | The share of a bank's assets financing activities aligned with the EU Taxonomy. |
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Financed emissions | tonnes of carbon dioxide equivalent | annual | PCAF methodology applied to loan and investment books | ESTIMATED |
| Exposure to climate-policy-relevant sectors | percent of loan book | annual | Pillar 3 ESG disclosures | REPORTED |
| Collateral in high physical hazard zones | percent of secured lending by hazard class | annual | Hazard maps overlaid on collateral locations | MODELLED |
| Scenario credit loss under NGFS pathways | change in expected loss relative to baseline | per exercise | Climate stress tests and scenario analysis | MODELLED |
| Green asset ratio | percent of covered assets | annual | EU Taxonomy disclosures | DECLARED |
| Energy performance of mortgage collateral | share of collateral by energy performance certificate class | annual | Property registers and certificates | REPORTED |
| Nature dependency and impact materiality | qualitative rating by sector | annual | ENCORE and bank materiality assessments | ESTIMATED |
The topic as a computational graph: named sources feed the methods, an evidence review gates the outputs, and the decisions stay with the authorities that hold them.
Fig. 02Nodes carry their type, two metric rows and a state; connectors show what feeds what; dashed frames name the owners; the timeline is the cadence. Design of the pipeline, not a record of a run.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| NGFS scenarios | Transition and physical risk pathways with macroeconomic variables for scenario analysis | Free, attribution |
| ECB climate stress test and climate-related statistical indicators | Supervisory exercise methodology and experimental indicators of euro area bank exposures | Free, attribution |
| Bank of England Climate Biennial Exploratory Scenario | Design and published results of the exploratory exercise for UK banks and insurers | Free, Bank of England terms of use |
| Pillar 3 ESG disclosures under EBA standards | Bank-reported exposures to carbon-intensive sectors, physical risk and taxonomy alignment | Public, bank terms |
| PCAF Global GHG Accounting and Reporting Standard | Methodology and data quality scores for financed emissions | Free standard; emission factor database by membership |
| Copernicus Climate Change Service and JRC hazard maps | Physical hazard layers for flood, heat and drought | Free and open, attribution |
| ENCORE | Mapping of economic sectors' dependencies and impacts on nature | Free, attribution |
Banking Nexus prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Bank board and board risk committee | How climate and nature risks enter risk appetite, strategy and transition planning | Materiality assessment, scenario results and sector exposures |
| Credit risk function | How to reflect physical and transition risk in ratings, collateral valuation and IFRS 9 overlays | Borrower-level hazard and transition data, scenario-adjusted loss estimates |
| Prudential supervisor | Whether a bank meets supervisory expectations on climate risk and whether Pillar 2 measures are warranted | Exercise results and gap assessments against the BCBS principles |
| Central banks and supervisors in the NGFS | Which scenarios to publish and use, and how to communicate their uncertainty | Scenario pathways, model comparisons and data gaps |
Which loan books and collateral sit in areas exposed to floods, storms, heat, drought and sea-level rise.
How policy, technology and market changes affect borrowers in carbon-intensive sectors.
Which borrowers depend on water, soils, pollination and other ecosystem services.
How to analyse risks that unfold beyond typical loan maturities and planning horizons.
Physical hazards affect collateral values, borrower income and insurance availability. Where insurance is withdrawn or becomes unaffordable, risk shifts back to borrowers and lenders.
Transition risk arises from changes in policy, technology and preferences. Assets in high-emission sectors may lose value faster than expected, and borrowers may face higher costs or lower demand.
Nature-related risk is harder to measure. Agriculture, food processing, water-intensive industry and tourism depend on ecosystem services whose degradation may be gradual and then abrupt.
Horizons mismatch. Many climate effects unfold over decades, while loans and capital planning run over years. Short-term analysis may understate risks that grow over time, and long-term analysis carries deep uncertainty.
Physical and transition risks interact with each other and with other shocks, so compound scenarios are more informative than single-factor analysis.
| Method or data | What it shows | Its limit |
|---|---|---|
| Hazard and exposure mapping | Collateral and borrowers in exposed areas | Asset location data often poor |
| Climate scenarios | Exposure under alternative pathways | Deep uncertainty; not forecasts |
| Sector transition analysis | Vulnerable industries and borrowers | Depends on policy assumptions |
| Nature dependency tools | Reliance on ecosystem services | Early-stage methods and data |
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.