Across Europe, financial supervisors are increasingly clear: climate risk is a financial risk. As new capital requirements come into force under CRR III and CRD VI, banks are expected to treat climate risk as a prudential risk, on par with credit, market, and operational risks.

To understand how prepared the banking sector is for this shift, Envira has conducted a study of 48 European banks, assessing their progress in integrating climate risk into governance, risk management, and capital planning. The results reveal a sector in transition—aware of the challenge, but not yet fully equipped to manage it quantitatively.

Climate Risk Moves Into the Core of Prudential Regulation

The prudential treatment of climate risk represents a fundamental change in how financial stability is understood. Environmental and transition risks are no longer external concerns; they are integral to how banks assess resilience, allocate capital, and plan for long-term solvency.

Supervisory authorities, including the European Central Bank (ECB) and the European Banking Authority (EBA), now expect banks to embed climate-related risks within their existing frameworks for risk identification, monitoring, and reporting. However, both regulators and recent assessments, including our own, indicate that most institutions are still at an early stage of implementation.

Findings From Envira’s Analysis of 48 European Banks

Envira’s analysis examined how banks across the EU have incorporated climate risk into their internal processes. While most institutions have made progress at the governance level, the integration into quantitative risk frameworks remains limited.

Key findings include:

• ✅ Governance structures are in place. Most banks have established board-level committees or oversight mechanisms for climate-related risks.
• ⚠️ Integration into risk models and ICAAP is limited. Few banks have embedded climate scenarios or data into their internal capital adequacy assessments or stress-testing frameworks.
• 📉 Regulatory readiness is incomplete. None of the assessed institutions achieved a full score on Envira’s Regulatory Readiness Score, and even the largest, most advanced banks fall short of supervisory expectations.

The overall picture is one of strategic recognition but operational lag. Climate risk has entered boardroom discussions, yet it has not been fully integrated into the quantitative systems that drive capital and credit decisions.

Bridging the Gap Between Policy and Practice

Closing this gap is now a key regulatory and strategic priority. Supervisors expect banks to demonstrate measurable integration of climate risk—supported by credible data, updated models, and evidence of capital implications.

To achieve this, banks must:

• Improve data quality and coverage, including sectoral and geospatial exposure data
• Integrate both physical and transition risks into risk models and ICAAP frameworks
• Apply scenario-based methods consistent with EBA and ECB expectations
• Ensure continuous board-level oversight and accountability

From Awareness to Action

Envira’s research shows that the European banking sector has acknowledged climate risk, but the next phase will demand quantifiable integration. The prudential lens on climate risk will increasingly shape how institutions assess resilience, allocate capital, and comply with regulatory expectations.

At Envira, we support financial institutions in translating these regulatory requirements into practical, data-driven methods for climate risk assessment and management across lending, stress testing, and capital planning.

Read the full report here:
Climate Risk as Prudential Risk

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