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Frank Elderson
Member of the ECB's Executive Board
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  • SPEECH

Deepening our commitment to confronting the climate and nature crises

Welcome address by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the International Monetary Fund OEDNE/World Bank Group EDS19 Constituency Meeting

Luxembourg, 4 July 2025

We live in a dynamic and increasingly complex world. External shocks have become more frequent and persistent of late, profoundly altering our economies and presenting us with a myriad of challenges.

Over the past few years, we have faced the most severe pandemic since the 1920s, the most devastating conflict in Europe since the 1940s and the worst energy shock since the 1970s.[1] Meanwhile, rising geopolitical tensions are reshaping global trade patterns and prompting a reassessment of broader strategic considerations. The rapid digitalisation of our economies brings both complex challenges and immense opportunities. And the escalating climate and nature crises pose an existential threat, jeopardising the stability and resilience of our economic system.

In such an environment, we must ensure that our monetary policy strategy remains fit for purpose. To this end, we revised our strategy in 2003, updated it again in 2021 and announced the outcome of our most recent exercise earlier this week.

Monetary policy strategy

Our monetary policy strategy is firmly rooted in our mandate. The ECB’s primary objective is to maintain price stability in the euro area. This remains the cornerstone of all our actions. Without prejudice to this primary objective, the Eurosystem is also obliged to support the general economic policies in the EU.[2]

The encouraging news is that the fundamentals of the strategy we adopted in 2021 have proven resilient, even in the face of the shocks and challenges of the past few years. Consequently, the exercise we have just completed can best be described as an assessment, with the core pillars of our strategy remaining unchanged.[3]

Earlier this week, we confirmed that price stability is best maintained by targeting an inflation rate of two per cent over the medium term. We also recognised that our target is symmetric, meaning that our monetary policy action will be appropriately forceful or persistent in response to large, sustained deviations of inflation from the target in either direction. All tools will remain available in our toolkit. Acknowledging the increased uncertainty in the inflation environment, we reiterated that our monetary policy decisions, as well as the evaluation of their proportionality and potential side effects, are based on a comprehensive and integrated assessment of all relevant factors.

The impact of nature degradation on the economy

In the 2021 monetary policy strategy review, the ECB’s Governing Council recognised the significance of climate change for monetary policy. This led to the creation of a concrete climate action plan, which the ECB and the Eurosystem have made significant progress on over the past four years.[4]

Given the close link between climate change and nature degradation, the 2025 assessment clarified the pivotal role of nature in our ability to fulfil our mandate. Specifically, the Governing Council committed, within its mandate, to ensuring that it fully takes into account the implications of both climate change and nature degradation for monetary policy and central banking.[5]

As I have often emphasised in the past, this does not mean we are climate and nature policymakers.[6] These policies are set by governments and it is their prerogative to address the climate and nature crises. We are climate and nature policy takers. At the same time, as I will argue in more detail today, we have no option but to take the effects of the climate and nature crises into account to deliver on our monetary policy and banking supervision mandates.

This being said, adding the three words “and nature degradation” to our monetary strategy statement is an important step forward. Climate refers to the statistical patterns of weather over time – a pattern that is visibly changing, with major implications for our economy. Nature, on the other hand, encompasses the entirety of Earth’s physical environment, including all living organisms. It is everything not made by humans. So, by adding “nature degradation” we have now committed to considering a vastly more complex set of factors in setting our monetary policy.[7]

Considering the impact of nature degradation on our price stability mandate reflects our commitment to data and evidence-based decision-making. From a central bank perspective, nature is an asset. It provides many ecosystem services – fertile soils, pollination, timber, fish stocks, water and clean air, to name just a few – supporting sustainable economic growth and financial stability. If ecosystems deteriorate, we are essentially depreciating a vital input into our economy.[8]

Let me draw a parallel with the traditional factors of production. When physical or human capital depreciates, firms and households respond by investing, as it is often far more cost-effective to sustain the capital stock than to seek substitutes, if alternatives exist. However, our collective investment in nature remains vastly insufficient to counteract the current rate of deterioration.[9] We are not living off its rents, but we are massively eating into nature’s capital stock. Any economist knows that this is unsustainable, and everything unsustainable will end. Being able to put a clear monetary value on nature would help attract and guide investment in preservation and restoration by offering financial rewards, while also making it possible to hold those who damage ecosystems financially accountable.

ECB research has shown that 72% of euro area companies depend on at least one of nature’s ecosystem services. These services are declining at a faster rate than at any time in human history. Further research by the ECB and the University of Oxford’s Resilient Planet Finance Lab is looking at the risks more closely. First results indicate that 15% of the euro area economy output is at risk from water scarcity alone and over €1.3 trillion of euro area bank loans are currently extended to sectors exposed to high water scarcity risk.[10]

Even more worryingly, as our models improve and more data becomes available, estimates of the economic impact of the climate and nature crises are consistently revised upwards.[11] For example, according to the latest estimates from the Network for Greening the Financial System, the potential loss of global GDP if climate action falters is now projected to be three times higher than in earlier assessments from just a few years ago.[12]

Nature preservation and restoration offers no shortcuts. Rebuilding natural ecosystems is a time-intensive process, much like developing physical or human capital. Improvements in soil or water quality typically do not happen overnight, and crossing critical tipping points – beyond which minor disturbances can trigger irreversible shifts in the state of an ecosystem – can effectively render the damage permanent.[13] From an economic perspective, taking preventive action to avoid lasting harm to the factors of production makes perfect sense. It seems particularly prudent since many ecosystem services have the potential to (partially) recover if not overexploited for short-term economic gains. Waiting until tipping points are reached would, in many cases, have far more costly consequences.[14]

Alongside the well-documented climate crisis[15], there are thus clear signs that the nature crisis also poses significant risks to our economy.[16] These risks could severely affect our economy and complicate our task of maintaining price stability. Ignoring them would be tantamount to disregarding robust, fact-based evidence, which would be as indefensible as failing to consider any other threat to our price stability target.

Unfortunately, given nature’s complexity, its interaction with climate change and the current lack of robust data, we do not yet have the necessary tools to fully assess the implications of nature degradation for our mandate. By including nature degradation in our monetary policy statement we are therefore also implicitly calling for further research and improved data reporting – areas we will also contribute to. This additional work is crucial to ensure that our monetary policy is set appropriately and in a proportionate manner.

Where we stand and the path ahead

The challenge of nature degradation fundamentally stems from a deeply rooted market failure. Addressing this failure falls primarily within the remit of policymakers, not of central banks. However, from the perspective of our primary[17] (and secondary[18]) mandate, along with further obligations under the EU Treaties,[19] we have a responsibility to evaluate and consider the economic implications of climate change and nature degradation, including both physical and transition risks.

We are not starting from scratch.[20] Over the past three years, we have conducted and published initial research on nature-related risks, shedding preliminary light on the severity of the issue.[21] We have clarified the legal foundations for actions taken within our mandate.[22] And we recently disclosed for the first time the exposure of our corporate portfolios to potential nature-related losses.[23]

Our future work plan will delve deeper into the economic, financial and monetary policy implications of nature-related risks. This will complement ongoing efforts to better understand the green transition and the physical impact of climate change.

However, central banks cannot bridge this knowledge and data gap alone.

In light of the macro-criticality of the climate nature crises, not only in Europe but even more so in developing and emerging economies, it is encouraging that a wide range of institutions are developing tools and taking action.[24]

Institutions like the International Monetary Fund (IMF) play a pivotal role in evaluating the implications of climate change and nature degradation, given their mandates to safeguard global macroeconomic and financial stability. We welcome the IMF’s continued efforts to enhance its surveillance activities, such as the Financial Sector Assessment Programs and Article IV consultations, as well as its deployment of financing tools like the Resilience and Sustainability Trust to bolster climate resilience and support the transition to low-carbon economies.[25]

Conclusion

Let me conclude.

We are dedicated to making decisions on the basis of data and evidence.

Therefore, within our mandate, we remain committed to ensuring that the Eurosystem fully takes into account, in line with the EU’s goals and objectives, the implications of climate change and nature degradation for monetary policy and central banking.

Given the uncertainties surrounding these risks, continuous scientific input is essential to understanding the impact of the climate and nature crises on our economies. Active collaboration across institutions and borders is essential to enhance our understanding of the economic implications and to deliver on our mandate.

  1. Lagarde, C. (2024), “Setbacks and strides forward: structural shifts and monetary policy in the twenties”, speech at the 2024 Michel Camdessus Central Banking Lecture organised by the IMF, Washington, 20 September.

  2. The Treaty prescribes that without prejudice to this primary objective, the Eurosystem is also obliged to support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union – including a high level of protection of the environment (Article 127(1) and Article 282(2) of the Treaty on the Functioning of the European Union; the objectives of the Union are laid out in Article 3 of the Treaty on European Union).

  3. Lagarde, C. (2025), “Strategy assessment: lessons learned”, speech at the 2025 opening reception of the ECB Forum on Central Banking 2025 "Adapting to change: macroeconomic shifts and policy responses", Sintra, 30 June.

  4. For example, we have made significant progress in improving our capabilities to take climate considerations into account in the macroeconomic analyses that inform our monetary policy assessment. Moreover, between October 2022 and July 2023 we started tilting our reinvestments of corporate bonds towards issuers that have a better climate performance. In so doing, we can avoid undue exposures to climate-related risks that are detrimental to price stability and align the way we administer our monetary policy more closely with the EU’s general economic policies. In addition to our bond holdings, we are looking at incorporating climate risk considerations in the collateral framework that we apply in relation to banks’ participation in our lending operations.

  5. ECB (2025), “ECB’s Governing Council updates its monetary policy strategy“, press release, 30 June.

  6. See, for example, Elderson, F. (2023), “Policymakers as policy takers – accounting for climate-related and environmental factors in banking supervision and monetary policy”, speech at the Peterson Institute for International Economics, Washington DC, 21 April and Elderson, F. (2024), “Taking into account climate and nature in monetary policy and banking supervision around the world”, speech at an event on climate-related financial risks hosted by the Banco Central do Brasil, Rio de Janeiro, 27 March.

  7. Unlike the climate crisis – which can be quantified through carbon emissions and their direct link to rising temperatures – there is no single metric to capture the diverse range of nature’s ecosystem services. This complexity makes incorporating nature into our mandate much more challenging; see Elderson, F. (2025), “Nature’s bell tolls for thee, economy!”, keynote speech at the Naturalis Biodiversity Center, Leiden, 22 May.

  8. For a comprehensive assessment of the role of ecosystem services in the economy, see Kareiva, P., Tallis, H., Ricketts, T.H, Daily, G.C. and Polasky, S. (eds.) (2011), Natural capital: theory and practice of mapping ecosystem services, Oxford University Press, Oxford.

  9. The stock of natural capital per person declined by nearly 40% between 1992 and 2014, posing a serious threat to the prosperity of current and future generations (Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta Review, HM Treasury, London).

  10. Nearly 15% of euro area GDP would be at risk from severe surface water shortages during a 1-in-25-year drought; see Ceglar, A., Danieli, F., Heemskerk, I., Jwaideh, M. and Ranger, N. (2025), “The European economy is not drought-proof”, The ECB Blog, ECB, 23 May. Moreover, the blog post states that €1.3 trillion in euro area bank lending (more than 34% of corporate loans) is to sectors exposed to high water stress. Additionally, recent empirical research by Oxford University, one of the first of its kind, demonstrates that both domestic and international nature degradation could lead to an estimated 12% reduction in UK GDP in the years to come. News about biodiversity loss also matters, as it increases spreads on credit default swaps more for countries with more depleted ecosystems.

  11. A study by Blackrock also argues that markets have historically not been very good at capturing all of the value of natural capital and its services in market prices, especially when the underlying resource is shared rather than owned. For example, markets are relatively inefficient at attributing a price to natural wild bees and other pollinators, which are estimated to have an implicit annual global value of USD 195-387 billion. See Capital at risk: nature through an investment lens, Investment perspectives August 2024.

  12. Aerts, S., Stracca, L. and Trzcinska, A. (2024), “Economic losses from climate change are probably larger than you think: New NGFS scenarios”, VoxEU Column, CEPR.

  13. See CarbonBrief (2020), Explainer: Nine ‘tipping points’ that could be triggered by climate change, 10 February.

  14. See Lenton, T.M. et al. (eds.) (2023), The Global Tipping Points Report 2023, University of Exeter, Exeter, United Kingdom.

  15. For the climate crisis, see, for instance, Munich RE (2025) “Climate change is showing its claws: The world is getting hotter, resulting in severe hurricanes, thunderstorms and floods”, media release, 9 January.

  16. Unlike climate, nature is far harder to quantify within a single metric, but the threats to our economy are numerous. For example, the degradation of coastal and marine ecosystems poses risks to global GDP of a magnitude of 3-5% (Patil, P.G. et al. (2016), Toward a Blue Economy: A Promise for Sustainable Growth in the Caribbean, World Bank). Similarly, farmland degradation is significantly undermining agricultural productivity worldwide. Pressures on farmland could reduce global food productivity by 12% and raise food prices by up to 30% by 2040 (see Noel, S. et al. (2015), Report for policy and decision makers – Reaping economic and environmental benefits from sustainable land management, Economics of Land Degradation Initiative, Bonn, Germany, and Kopittke, P.M et al. (2019), Soil and the intensification of agriculture for global food security, Environmental International, Vol. 132, November”). The scarcity of clean water is another critical issue, jeopardising agricultural output while also significantly affecting other sectors (Elderson, F. (2025), op. cit.). Declining water quality has already caused a sharp reduction in recreational visits, with estimated economic losses exceeding €100 billion annually (see Borger et al. (2021), The value of blue-space recreation and perceived water quality across Europe: A contingent behaviour study, Science of The Total Environment, Vol. 771). The interplay between nature and climate change amplifies these challenges. For instance, the degradation of forests and wetlands diminishes their capacity for carbon sequestration (Maes, J., Teller, A., Erhard, M., Condé, S., Vallecillo, S. et al. (2020), Mapping and assessment of ecosystems and their services – An EU wide ecosystem assessment in support of the EU biodiversity strategy, Publications Office of the European Union).

  17. This is clear from significant recent research. In 2022 the Network for Greening the Financial System (NGFS) already emphasised that nature-related risks could have significant macroeconomic implications. See NGFS (2022), Statement on Nature-Related Financial Risks, Paris, 24 March. The OECD has also pointed out that sustained decreases in the supply of commodities and higher prices may lead to macroeconomic inflationary pressures. See OECD (2023), “A supervisory framework for assessing nature-related financial risks: Identifying and navigating biodiversity risks”, OECD Business and Finance Policy Papers, No 33, Paris, September. The European Commission has likewise noted that nature-related risk drivers can affect factors such as inflation, labour productivity and the overall economy through macroeconomic transmission channels. See Cziesielski, M. et al. (2024), Study for a methodological framework and assessment of potential financial risks associated with biodiversity loss and ecosystem degradation – Final report, European Commission, Brussels, March.

  18. Addressing the impact of climate change, the carbon transition and nature degradation is a key policy priority for the European Union. Accordingly, and without prejudice to its primary mandate of price stability, the ECB is legally obligated to contribute to tackling these challenges (see the factsheet on environmental policy issued by the European Parliament).

  19. Beyond the secondary objective, the ECB has to comply with two key transversal principles of the Treaties. Article 11 of the Treaty on the Functioning of the European Union (TFEU) provides that the EU’s environmental protection requirements must be “integrated into the definition and implementation of the Union's policies and activities”. This imposes an obligation on the ECB to take into account the EU’s policies to protect nature when shaping its own policies and performing its tasks. In addition, under Article 7 of the TFEU, the activities and policies of the ECB need to be consistent with EU law – including EU law on nature and biodiversity. O’Connell, M. (2024) “Birth of a naturalist? Nature-related risks and biodiversity loss: legal implications for the ECB”, ECB Legal Working Papers, No 22, June.

  20. On the supervisory front, the ECB has also taken significant steps to ensure that banks adequately manage their climate and nature related risks. Nature degradation affects banks’ balance sheets by serving as a risk driver across the traditional risk categories defined in the prudential framework. ECB Banking Supervision has acknowledged the materiality of these nature-related risks and integrated them into its supervisory engagements with banks. For instance, the ECB issued a guide for banks setting out clear supervisory expectations for identifying and managing these risks, including broader environmental challenges (see ECB (2020), Guide on climate-related and environmental risks, November). Additionally, climate and environmental risks have been identified as a key supervisory priority for the period from 2022 to 2027 (see ECB (2024), Supervisory priorities 2025-27).

  21. See Ceglar, A., Danieli, F., Heemskerk, I., Jwaideh, M. and Ranger, N. (2025), op. cit.

  22. See O’Connell, M. (2024), op. cit. and Elderson, F. (2024), “Nature-related risk: legal implications for central banks, supervisors and financial institutions”, keynote speech at the ESCB Legal Conference 2024, Frankfurt am Main, 6 September.

  23. See ECB (2025), “ECB adds indicator of nature loss in climate-related financial disclosures as portfolio emissions continue to decline”, press release, 12 June.

  24. Low-income economies are generally more reliant on nature's services than high-income economies, making them disproportionately vulnerable to the consequences of nature degradation. See Dasgupta, P. (2021), op. cit.

  25. Similarly, both the NGFS and the Financial Stability Board (FSB) have advanced work on addressing nature-related risks. For further details, see FSB (2024), Stocktake on Nature-Related Risks: Supervisory and Regulatory Approaches and Perspectives on Financial Risk, 18 July and NGFS, Nature-related risks.

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