ECB Warns Climate Crisis Risks Financial Stability as Ecosystem Services Decline

Frank Elderson, a member of the European Central Bank's (ECB) executive board, has warned that the climate crisis poses a growing threat to 'core financial stability'. The ECB is stepping up its monitoring of financial risks linked to ecosystem services, which are nature-related processes or assets that support human activity.

Ecosystem services, such as water and air quality, are in rapid decline due to global heating. Elderson stated that relying on these services is more complicated than mapping the impact of a single extreme weather event. He emphasized that 'nature-related risks can pose material economic and financial risks' through their impacts on credit risk, growth, inflation, and potential financial instability.

The ECB has launched a programme to assess how ecosystem degradation could expose banks to credit loss dynamics. The bank plans to publish analysis later this year investigating the relationship between ecosystem services and credit loss for Europe's largest banks. Elderson, who was instrumental in creating the Network for Greening the Financial System (NGFS), stated that addressing climate-related risks is essential for financial stability.