meta_id 3137142

In May 2026, the European Central Bank (ECB) published an updated report on good practices for climate and nature-related risk stress testing, building on its initial 2022 climate risk stress test (CST) exercise. The report reflects supervisory observations from follow-up activities conducted between 2023 and 2025 across significant institutions under ECB supervision. The report identifies good practices across three primary areas: the design of internal climate stress-testing frameworks, data collection strategies for climate-related risks, and techniques for integrating climate risks into credit risk models. By the end of 2024, all significant institutions had integrated climate risk into their stress-testing frameworks, compared to only 41 percent in 2022. However, the ECB observed that material risk drivers, relevant portfolios, and key transmission channels remain overlooked in some cases. The 2026 update expands coverage beyond the original 2022 focus on transition risk. New sections address physical risk modelling approaches—including acute and chronic physical risks—and emerging practices for integrating nature-related risks into stress testing. The report emphasises that while transition risk approaches are generally more mature, physical risk modelling and nature-related risk integration remain nascent across the industry. The report provides practical examples of counterparty-level modelling, sectoral approaches, and asset-class-specific techniques for transmitting climate risks to probability of default and loss given default parameters. The ECB notes that data challenges persist, particularly regarding greenhouse gas emissions collection and energy performance certificates for real estate portfolios. The report documents good practices for addressing data gaps through proxy estimation methodologies, including physical activity-based and economic activity-based approaches aligned with Partnership for Carbon Accounting Financials guidance. The report is non-binding and illustrative only. Institutions may achieve full compliance with applicable regulatory frameworks through alternative measures appropriate to their risk profile, business model, and circumstances. The report complements the European Banking Authority (EBA) Guidelines on environmental scenario analysis, which enter into effect on 1 January 2027.