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Extreme weather events are becoming more frequent, and while many sectors have taken steps, some have not—especially banking. A striking finding from the Bank of Spain’s climate stress test is that roughly 60% of banking institutions lack robust climate risk stress-testing frameworks and also lack sufficient data on this topic. These aren’t isolated observations; they point to a broader pattern where risk intelligence around climate factors is underdeveloped. In a wider view, nearly two-thirds of the revenues from non-financial business customers come from sectors with a limited number of large counterparties and high greenhouse gas emissions. The broader takeaway in a speech on sustainable finance, delivered by Mercedes Olano, Managing Director of Audit at the Bank of Spain, was clear: organizations generally do not appear to meet information requirements related to climate and environmental risks. This signals a call to invest in more complete disclosures and sharper risk management practices across industries (Bank of Spain).
The European Central Bank (ECB) conducted its own assessment and found a similar pattern of under-inclusion. The majority of lending institutions do not factor climate risk into their credit risk models. In fact, only about 20% of banks incorporate this variable into lending decisions. Regulators note that fewer than 10% of organizations rely on detailed, forward-looking information to manage climate and environmental risks. As Olano explains, there is a need for more sophisticated methodologies built on richer data that can cover major portfolios, broad geographic exposure, and diverse risk drivers. While some organizations are beginning to use transition planning tools to reshape business models over the long term, a persistent wait-and-see approach remains common (Bank of Spain).
Yet there is improvement to report. The ECB highlighted progress in awareness and governance. More than 80% of banking institutions acknowledge that climate risks materially affect risk profiles and strategic planning. Seventy percent recognize the significance of these risks within a three- to five-year planning horizon. There has been advancement in enterprise architecture to support this effort, with over 85% of banks showing core applications aligned with the central bank’s strategic directions. Nevertheless, the report also notes meaningful gaps, with about 10% of the 135 participating organizations lagging behind and failing to demonstrate material progress over the past year (ECB insights). This snapshot underscores a dual reality: rising recognition and uneven execution across the sector (ECB).
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Supervisors expect banks to speed up the development of transition strategies, setting specific objectives and clearly identifying all risks tied to the execution of the various phases to meet the latest regulatory demands. The first period concluded in March of this year and required institutions to classify climate-related and environmental risks and complete an assessment of their operational impact. By the end of 2023, banks should embed these risks into governance structures, strategic planning, and risk management frameworks, with full compliance anticipated by the end of 2024. Supervisory expectations also cover internal capital adequacy assessments and the ongoing stress-testing process. This sequence reflects a structured, multi-year path toward resilience, accountability, and transparent governance (Bank of Spain).
In November 2022, the Corporate Sustainability Reporting Directive (CSRD) took effect, prompting companies to align sustainability information with financial reporting. The Bank of Spain hopes this alignment will assist lenders in collecting data on counterparties’ environmental, social, and governance aspects. The Basel Committee has integrated climate-related financial risks into its work plan, while the European Banking Authority (EBA) has issued a roadmap addressing various climate risk components. The combined effect of these developments is a push toward richer data ecosystems, standardized disclosures, and tighter risk management across the European financial landscape (Bank of Spain).