The Evolving Landscape of Climate Risk Disclosure for Banks

Climate change poses a growing challenge for the banking sector, with far-reaching impacts on economies and communities. With their central role in economic systems, banks will be at the forefront of how we respond. This is why there are increasing regulations and guidance on climate risk disclosure for banks. These are especially important to banks that finance and provide financial services to the agricultural sector, which is inherently connected to environmental issues. Here, we explore key regulatory requirements for EU-based banks and their specific implications for agricultural finance.

Why Are Banks Required to Report Climate Risks?

The European Central Bank (ECB) has highlighted that “physical damage caused by climate change and environmental degradation can have a significant impact on the real economy and the financial system.” In response, the ECB and other regulators have engaged with banks to enforce the transparent collection, reporting, and integration of climate-related data into risk management frameworks. Such requirements are essential for maintaining the resilience and stability of the financial system as it confronts the challenges of a changing climate.

What is the Difference between Physical Risk and Transition Risk?

To comply with climate disclosure mandates, banks must identify and evaluate two types of climate risks: physical risks and transition risks.

• Physical Risks: These involve direct financial impacts stemming from climate-related events. These can be further categorized as:
  1. Acute Risks: Sudden events like floods, droughts, and storms, all of which can be catastrophic for yields and harvests.
  2. Chronic Risks: Long-term shifts, including rising temperatures, sea levels, and resource scarcity, many of which may impact the areas where different crops can be profitably grown.
• Transition Risks: As economies progress toward net-zero emissions, entities face risks associated with regulatory shifts, like new carbon taxes or emissions standards. For example, regulations around agricultural-related emissions may affect the profitability of different products and farming methods.

What are the Capital Requirements Regulations (CRR)?

The Capital Requirements Regulation (CRR) is the European Union’s framework that banks must follow to ensure financial stability and resilience against various risks, including climate-related risks. Within this, Article 449a relates to physical risks, detailing how banks need to classify, analyze, and report their risk exposure. While initially only the largest, “significant” institutions were subject to these rules, the CRR III update (effective January 2025) extends the requirement to smaller and less complex banks across the EU. This expansion underscores the necessity of climate risk disclosure as a component of effective financial oversight.

The Strategic Importance of Agriculture

The agricultural sector faces high exposure to climate risks. In an official review published last year, the ECB found that the agricultural sector was at risk over each of the short, medium, and long term, more than any other sector. This is because so many of the outputs from agriculture are so inherently linked to the natural environment. The climate impacts not just the growth of crops but also the spread of pests and diseases, and the ability of farmers to cultivate their land and harvest their crops. Many livestock farmers rely on silage from grass grown in their fields to feed their herds. This year, an extremely wet first half of the year led to the worst wheat harvest in France for over 40 years, and climate models suggest the frequency and intensity of such extreme weather events will increase. Lost harvests can be catastrophic for farmers, with the missing income compounded by the sunk costs of all the invested time and inputs.

Tools for Managing Physical Climate Risk in Agricultural Finance

Climate change will lead to more volatile weather, which in turn, unless adaptation measures are adopted, will lead to more volatile incomes from farming. Banks must gain a precise understanding of this climate risk to manage their exposure effectively. At Finres, our AgFortis platform equips banks with actionable insights by integrating precision climate data and agronomic science. The data available through AgFortis is valuable for banks that need to disclose their physical climate risk.

Farmers are also supported through the free version of the AgHorizon application, which provides postcode-specific climate insights tailored to each crop, alongside economic projections for various adaptation measures. This ensures that farmers can invest in resilience-building strategies with confidence, knowing these adaptations will mitigate potential climate shocks. Given the financial stress and challenges faced by many farmers, this data enables informed conversations with banks and other stakeholders across the food value chain about how to bolster their resilience.

Learn More

Finres is dedicated to bridging the gap between cutting-edge climate science and the resilience of agriculture. We invite you to reach out to discover how AgFortis, AgHorizon, and our suite of solutions can enhance your institution’s approach to climate risk management and disclosure.