Climate risk used to sit inside sustainability teams, reported alongside ESG disclosures. It is now expected to sit inside credit, market and liquidity risk management, as a core input to how banks price and manage risk, not a side commitment.
How We Got Here
The regulatory build-up has been unusually long and consistent for a topic that only recently went mainstream: the European Central Bank’s Guide on Climate and Environmental Risks in 2020, the ECB’s economy-wide climate stress test in 2022, the Basel Committee’s climate risk principles in 2023, and now the European Banking Authority’s final guidelines on ESG risk management, published on 9 January 2025 and applying from 11 January 2026, with a one-year extension, to 11 January 2027, for less complex institutions.
Alongside this, the revised Capital Requirements Regulation (CRR III) has been in force since 1 January 2025, and the Capital Requirements Directive (CRD VI) required national transposition by 10 January 2026. Together, these introduce a formal distinction banks must now work with: transition risk (legal and financial exposure from the shift to a low-carbon economy) and physical risk (economic loss to a bank’s counterparties or invested assets from the physical effects of climate change).
What This Actually Requires
The EBA guidelines task credit institutions with systematically identifying, assessing, managing and monitoring both categories of risk, not as a reporting exercise but as an input into how banks assess borrower creditworthiness, model probability of default, and manage balance-sheet exposure. For physical risk specifically, this means understanding how flooding, heat stress, storms and other hazards affect the collateral and counterparties behind a loan book, mortgages, commercial real estate lending, and corporate credit alike.
Why This Is a Data Problem, Not Just a Policy Problem
Guidelines can mandate that physical risk be integrated into credit risk management. They cannot supply the underlying data. Banks need asset-level, forward-looking physical risk information, not portfolio-level sustainability narratives, to actually feed this into credit models, collateral valuation, and stress testing.
This is already showing up in practice. UK bank NatWest has strengthened the integration of physical climate data into mortgage and commercial-property lending, reflecting concerns about flood exposure and long-term asset resilience. Rabobank is investing in climate analytics for agricultural lending, incorporating rainfall patterns and water availability into credit assessments. These are early movers, not outliers, and the direction of travel across EU and UK supervision points the same way. The same asset-level, forward-looking approach is just as relevant on the insurance side of the ledger, see our analysis of Europe’s insurance protection gap.
Where This Leaves Lenders
Banks that treat this purely as a compliance exercise will end up needing the underlying exposure data anyway, for stress testing, for collateral risk, for the next round of supervisory review. The regulatory architecture already assumes physical risk is integrated into credit and prudential risk management; the institutions moving early are simply the ones that already have the asset-level data to back it up, rather than scrambling for it under supervisory pressure. Is your loan book exposed to physical climate risk you haven’t yet quantified? Visit our website or connect with us on LinkedIn to learn more about our climate risk data for financial institutions.