ECB's Elderson Warns Banks Face 'Radical Uncertainty' on Climate and Nature Risks

• 2026-10-17
• Climate & Energy
• News Desk
• Source: European Central Bank https://www.ecb.europa.eu//press/key/date/2026/html/ecb.sp261014~e4ca33588e.en.html

Frank Elderson, a member of the European Central Bank's Executive Board and vice-chair of its Supervisory Board, said on 14 October 2026 in Frankfurt am Main that banks must prepare for a world of "radical uncertainty" where climate and nature risks cannot be measured with confidence. Speaking at a joint ECB-Bank of England conference, he set out a framework of known knowns, known unknowns and unknown unknowns.

Key facts

What progress has been made on known climate risks?

• Frank Elderson, ECB Executive Board member and Supervisory Board vice-chair, spoke at the ECB-Bank of England Conference on supervising climate risk in a non-linear world in Frankfurt am Main on 14 October 2026.
• The conference brought together experts from 18 countries and three continents.
• Since 2022, the average share of interest income earned from carbon-intensive sectors by significant supervised banks has remained consistently above 70%, according to Elderson.
• Elderson cited geopolitical fragmentation, demographic change, artificial intelligence, quantum computing, and the climate and nature crises as trends that arise in complex, interconnected systems.
• He distinguished between measurable risk and "radical uncertainty", a concept he attributed to Frank Knight and later popularised by John Kay and Mervyn King.

Elderson said banks and supervisors have made substantial progress over the past decade in identifying, quantifying and managing climate and nature risks. He said they have built the foundational architecture needed to capture the "known knowns" in risk management, stress testing and scenario analysis.

According to Elderson, better tools, data and modelling mean the direct economic damage caused by climate and nature risks can increasingly be quantified. He pointed to the heavy toll that this summer's extreme weather took on economic activity, labour productivity and supply chains.

He also said banks increasingly understand how these risks transmit to traditional financial risk categories. With better climate hazard and geo-location data, banks can better model the financial impact of droughts and flooding on metrics such as loss given default, he said.

Elderson added that banks' initial estimates of how different transition scenarios affect their capital position are now known. He said supervisors also know the average energy performance of the properties banks finance, and what share of exposures they hold in areas vulnerable to physical risk and what proportion of those exposures has deteriorating credit quality. What remains unknown?

Elderson said the known unknowns are risks whose existence is clear but whose timing, magnitude or probability remains uncertain. He compared this to economic forecasting, noting that the economy, like the climate, is a complex adaptive system that cannot be forecast with precision.

He warned that many of the most important climate and nature risks are forward-looking by nature. Because they differ from past events, they are not fully understood and remain difficult to quantify, he said.

Elderson said the world is becoming more complex, more interconnected and more uncertain almost by the day. He said these trends can amplify shocks through feedback loops and lead to abrupt transitions through tipping points, with events once considered remote tail risks moving closer to tomorrow's baseline. Why does uncertainty matter for banks?

Elderson said addressing non-linearities is challenging but manageable as long as risks remain measurable. A bigger challenge arises in a world of uncertainty, where future events, their probabilities and even the relevant outcomes cannot be measured with confidence.

He said this form of uncertainty, which Frank Knight called uncertainty as distinct from risk and which John Kay and Mervyn King later popularised as radical uncertainty, raises fundamental questions for risk management. Traditional approaches assume that with enough data, robust models and a solid understanding of historical patterns, banks can estimate potential losses with reasonable precision, he said.

Those estimates inform how banks price risk, set aside provisions for expected losses and determine how much capital they need to absorb large, unexpected losses. Elderson said this approach works well when underlying relationships are broadly stable, and that today's modelling is supplemented by model overlays, stress testing, underwriting and risk appetite setting. What happens next?

Elderson used the conference to call for a broader conversation about what is not yet known, saying the progress made so far provides a springboard for discussing the fundamental challenges of climate and nature risks. The ECB-Bank of England conference continues, with experts from 18 countries and three continents discussing how to ensure resilience in a non-linear world.

Source: European Central Bank