Climate risk is no longer a sustainability issue sitting alongside mainstream finance. Libor Krkoska argues that it should be treated as a core financial risk and embedded directly into balance sheet planning, influencing capital adequacy, liquidity, credit quality, collateral valuation and long-term funding strategy. The article explores how both physical and transition risks can affect borrower performance, asset values and portfolio concentrations, while highlighting the importance of stronger data, disclosure and climate-related risk assessment.
Climate risk is no longer a sustainability issue sitting alongside
mainstream finance. It has become a core financial risk that should influence
everything from capital adequacy and liquidity management to credit quality,
collateral valuation and long-term funding strategy.
For financial institutions seeking resilience in an increasingly
uncertain environment, integrating climate considerations into balance sheet
management is becoming both a commercial necessity and a strategic opportunity.
According to Libor Krkoska, Deputy Director, Country Strategy at the
European Bank for Reconstruction and Development (EBRD), institutions should
approach climate risk with the same rigor they apply to more traditional
financial risks.
“Climate risk should be treated as a core financial risk and integrated
into balance sheet planning in the same way as credit quality or liquidity,” he
says.
Rather than viewing environmental challenges through a compliance lens alone,
organizations need to recognize their direct impact on borrower performance,
collateral values, insurance availability and overall financial stability. That
means considering both transition and physical risks.
Regulatory changes, carbon pricing, technological disruption and shifting
market expectations can reshape the competitiveness of entire industries, while
extreme weather events such as flooding and heat can directly damage assets and
disrupt economic activity.
Together, these forces have the potential to alter creditworthiness, reduce
asset values and introduce new forms of concentration risk across lending
portfolios.
To address these challenges, Krkoska argues that institutions should
strengthen climate-related risk assessment capabilities while improving data
quality and disclosure.
He says climate considerations should be embedded within credit analysis,
portfolio monitoring and capital planning rather than being treated as a
separate discipline.
“Institutions should therefore strengthen climate related risk assessment,
improve data and disclosure, and embed these considerations into credit
analysis, portfolio monitoring and capital planning,” he explains.
Risk appetite frameworks also need to evolve. Financial institutions have
traditionally measured sector concentrations according to industry or
geography, but climate introduces another dimension that cuts across both.
Carbon-intensive industries and sectors vulnerable to rapid technological
change require closer scrutiny, particularly where assets risk becoming
stranded or losing market value.
Krkoska believes transition planning offers an effective way of
evaluating these exposures. “Transition plans are a useful tool in this
context: they help assess whether clients have credible pathways to adapt their
business models, manage risks and identify investment needs,” he says.
Combined with portfolio monitoring, sector-level analysis and appropriate
exposure limits, such planning enables firms to engage proactively with clients
facing increasing transition pressures before financial risks become more pronounced.
