In May 2026, the European Central Bank (ECB) published the ‘Good practices for climate and nature risk management’ and how to integrate these risks into strategy, risk management and the Internal Capital Adequacy Assessment Process (ICAAP). Drawing on practices from over 60 institutions, the ECB shows how banks are moving beyond risk identification and starting to use relevant insights in day-to-day decisions. These requirements are not new, as the European Banking Authority’s guidelines on managing environmental, social and governance risks already apply to most institutions. For senior leaders, the direction is clear: climate and nature analysis must shape strategy, risk appetite, client decisions, pricing and capital planning.
Although banks have made progress, risk insights still do not sufficiently impact their strategic movement. According to the ECB, all supervised banks now have the basic architecture implemented to identify, assess and manage climate and nature risks. However, major gaps remain. Around two-thirds of banks still do not consistently link nature-risk assessments to management action. Few use nature-related risk indicators with clear limits, thresholds or defined responses. We have identified three common underlying issues.
Fragmented steering and unclear risk appetite
The issue is often not policy; it is the operating model. Transition plans may sit with sustainability teams, while strategy, credit, finance and risk teams use different data, assumptions and time horizons. This makes it difficult to turn analysis into decisions.
Insufficient data to identify significant nature-related risks
Nature risk adds further complexity. Banks often lack reliable data on client activities, asset locations, supply chains and ecosystem dependencies, and methods to translate water stress, biodiversity loss and soil degradation into credit, market, operational and legal impacts.
As complete data is unavailable, banks need documented data hierarchies, controlled proxies and data-quality scores, supported by client engagement and remediation plans to close the data gap.
Risk analysis is not embedded in transactions or capital
Banks should treat transition planning as a core steering capability, not as a reporting task. Strategy, risk, data, finance and the front office must work through one connected decision process.
Building a new risk engine
First, define a board-approved risk appetite and cascade it into portfolio limits, client criteria and escalation rules. Set key risk indicators, thresholds, owners and actions before dashboarding. For material exposures, the ENCORE tool (Exploring Natural Capital Opportunities, Risks and Exposure) maps sector dependencies, the IBAT databases flag proximity to sensitive areas and the PBAF (Partnership for Biodiversity Accounting Financials) initiative supports financed biodiversity impact assessment.
Second, combine the existing information from client data, public datasets and controlled proxies. Document gaps and improve the data most relevant to materiality and decisions.
Third, embed findings in due diligence, ratings, collateral, covenants, tenor and pricing. Test transition plans, finance credible change, attach conditions where progress is uncertain and restrict unmitigable exposure.
Finally, connect the results to capital. Scenario impacts should feed into probability of default, loss given default, risk-weighted assets and expected credit losses. Material outcomes should also feed into the ICAAP, considering all material risk types. Where data gaps prevent qualified quantification, document the uncertainties, apply governed expert judgement or overlays, and improve the evidence rather than exclude potentially significant risks.
Conclusion
The shift from ESG reporting to a functioning risk engine will not be achieved through another layer of disclosure. It requires climate and nature insights to influence the same decisions as other material risks: which clients and sectors to support, on what terms, within which limits and with how much capital. Imperfect data is not a reason to wait; it is a risk-management challenge that must be addressed through transparent assumptions, controlled proxies, expert judgement and clear remediation.
Banks that embed these considerations into everyday processes will be better placed not only to meet supervisory expectations, but also to anticipate portfolio vulnerabilities and identify credible transition opportunities. The goal is therefore not a standalone climate or nature framework. It is a connected operating model in which strategy, risk appetite, transactions and capital planning respond to a changing economy and natural environment.
How Capco can help
Capco helps banks build the described operating model through expertise in prudential and ESG risk, governance, climate and nature data, credit processes, scenario analysis, stress testing and ICAAP.
We connect risk, finance, sustainability, data and front-office teams to define appetite, build decision-ready data and embed results in lending, pricing and capital steering.
Contact us to discuss how we can help your bank be better prepared for future shocks and better placed to compete.
References
- Good practices for climate and nature risk management
- Good practices for advancing climate and nature-related risk management
- Guidelines on the management of ESG risks
- ENCORE
- IBAT | The world's most authoritative biodiversity data
- https://www.pbafglobal.com
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