Climate risks remain monetary risks

Uuriintuya Batsaikhan is a Consultant on the project ‘Financing the Green Transition in Europe’.

In December 2019, one month after Christine Lagarde became president of the European Central Bank, the European Council endorsed the goal of climate neutrality by 2050, supported by the European Parliament a few months later. This gave the ECB a legal anchor to make climate a legally binding, secondary objective. During the 2022 energy crisis, Lagarde highlighted the need to better understand climate change to ensure price stability, and climate entered the primary mandate.

Yet the prominence of climate could now be in jeopardy. Lagarde is set to step down as ECB president on 7 February 2027, and the terms of several of the ECB’s executive board members will expire soon afterwards. Their replacements may deprioritise climate policy, but it is imperative to continue Lagarde’s legacy and to build on the structure and personnel she installed.

The ECB’s climate agenda under Lagarde evolved in stages, but three developments stand out. First, the ECB strengthened its analytical capacity and adopted the premise that climate transition risks and shocks affect output, investment and prices. A central bank cannot, after all, deliver price stability without looking into significant factors affecting investment and supply chains. This was and continues to be done by integrating better data, mandating disclosures and integrating climate scenarios into macroeconomic projections.

Second, the ECB changed its monetary policy operations. In September 2022, the ECB announced that it would tilt its Corporate Sector Purchase Programme (CSPP) towards better climate performers, and in July 2025 the ECB introduced a ‘climate factor’ that would reduce the value of corporate collateral that is more exposed to the risks of the climate transition. With corporate bonds constituting only 1.6% of used collateral, this move was small in impact but large in its signal that the ECB is serious about integrating climate risks into its operations.

Climate shocks will continue to impact Europe’s prices and will last far beyond Lagarde’s presidency. But so will the people, structures and expertise that she built

Third, and perhaps most subtle, the ECB began to measure how its decisions affect the environment. The climate and nature plan 2024-2025 extended this to nature loss, on the logic that today’s environmental damage is tomorrow’s economic risk. This work remains unfinished.

All three stages evolved alongside work to embed climate policy institutionally. The ECB established a climate change centre in 2021, with climate change centres later established within each national central bank. The Network for Greening the Financial System, a collection of central banks and supervisors around the world looking at climate risks to monetary policy and financial stability, increased its membership from 54 to 152 during President Lagarde’s tenure.

Furthermore, in its role as a guardian of financial stability, the ECB ran the first supervisory climate stress test of the banking system in 2022. In November 2025, it imposed a penalty payment on a bank for failing to assess its climate risks. Climate risks have started being treated as any other prudential risk.

Little of this work is likely to be reversed; the measures are firmly anchored in the ECB’s mandate and are written into the 2025 Monetary policy strategy statement. The greater risk is losing momentum. The next ECB president must continue the current pace and further improve on the developments already mentioned, for two main reasons.

First is the space between core and headline inflation. Energy and food prices, on top of core inflation, constitute the headline target. The 2022 energy crisis raised inflation in more energy-intensive economies, while the summer heatwave of 2022 added 0.43-0.93 percentage points to food inflation, which persisted for a year. Food items are the largest category impacting consumer inflation, which can seep through to core inflation and have persistent second-round effects. With more frequent shocks, the gap between core and headline inflation is set to become more prominent.

Second is the distribution of shocks. The impacts of climate shocks will increasingly be uneven. Hotter summers raise food inflation more in southern countries, and Europe is warming at twice the global average. A study found that compensating the lowest quartile of households for inflation would have required a transfer three times as large relative to income compared to the top quartile. Inflation-related welfare loss impacts consumption, demand and expectations. Repeated shocks wear down buffers and make monetary policy harder to calibrate.

Climate shocks will continue to impact Europe’s prices and will last far beyond Lagarde’s presidency. But so will the people, structures and expertise that she built. Her successor must continue their work. Europe’s unified monetary policy can only be preserved by understanding and addressing the shocks that threaten to tear it apart.

This article is based on a Bruegel First Glance.