The European Central Bank (ECB) has expanded its macroeconomic modelling toolkit to incorporate nature degradation and climate-related shocks into its regular forecasting.
Indeed, ECB executive board member Philip Lane recently delivered a keynote speech detailing how climate change and the green transition are fundamentally altering monetary policy and banking stability.
Speaking in Frankfurt am Main, Lane made it clear that the era of treating climate change as a secondary “non-financial” risk is over, as the cumulative effects of global warming are now directly impacting inflation, productivity, and the resilience of the banking sector.
The speech followed data from the Copernicus Climate Change Service confirming that 2023, 2024, and 2025 were the hottest years in human history, with global temperatures currently sitting 1.4°C above pre-industrial levels.
Lane noted that Europe is warming faster than the global average, leading to a “new reality” of extreme weather events that act as high-variance shocks to the euro area economy.
The central bank’s analysis now accounts for how severe heatwaves, droughts, and flooding reduce labour efficiency and disrupt essential supply chains.
These “climate shocks” do not just affect the environment; they lower potential output by degrading agricultural land and damaging critical infrastructure.
Furthermore, the green transition, while necessary for long-term stability, introduces its own set of economic challenges.
The shift toward a low-carbon economy involves structural changes that can trigger “climateflation” as energy costs and production methods adapt to new carbon pricing and renewable energy standards.
Lane emphasised that the Governing Council is committed to ensuring the Eurosystem fully incorporates these dynamics into its economic modelling and forecasting.
A significant development in the ECB’s 2025 strategy assessment was the inclusion of nature degradation alongside climate change.
The loss of biodiversity and the erosion of “natural capital” are now seen as direct threats to the financial intermediation process.
If the ecosystems supporting industries like agriculture or pharmaceuticals fail, the banks lending to these sectors face significant credit risks.
“The protection of the planet is no longer just an environmental duty but a prerequisite for humanity’s welfare and economic stability,” Lane explained during the address.
The ECB is now using its expanded toolkit to monitor how asset prices and the financial system react to these dual threats of climate change and nature loss.
Lane further stated that while monetary policy cannot solve climate change on its own, it must be “climate-ready.”
This involves ensuring that price stability is not compromised by the volatility of the energy transition and that the banking system remains robust enough to finance the massive investments required for renewables.
By integrating these environmental factors into the core of central banking, the ECB aims to provide a stable foundation for the European economy to navigate the “turbulent waters” of the coming decades.