Frank Elderson: 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.