Climate Risk Management Among Major Global Banks: Readiness and Gaps

Key Insights:

With the EU’s Capital Requirements Directive (CRD VI) coming into effect, and amid the recently released Basel framework guidelines, IFRS S2 Climate-related Disclosures, and the European Banking Authority (EBA) guidelines, globally systemically important banks (G-SIBs) are under mounting pressure from regulators and investors to demonstrate credible, data-driven management of climate‐related financial risks. A report by Morningstar Sustainalytics analyzed all 29 G-SIBs, revealing some divergence in preparedness. While certain European and UK banks lead with advanced governance, scenario analysis, and integration of climate risk into capital and liquidity planning, some North American and Chinese institutions lag, particularly in quantitative assessment and disclosure. This article highlights some of the report’s findings. 

Figure 1. G-SIBs’ Alignment with Key Sustainability Metrics: Top Performers

_{Source: Morningstar Sustainalytics. Data as of September 11, 2025.} 

_{Note: Scores: 100 – Very Strong Performance; 75 – Strong Performance; 50 – Adequate Performance; 25 – Weak Performance.}

All G-SIBs have established strong climate governance structures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) framework, with boards overseeing climate risk and management tasked with assessing transition and physical risks. However, executive remuneration remains a key differentiator. As of September 11, 2025, 16 G-SIBs linked pay to climate targets, supporting accountability and aligning incentives with long-term strategy. Banks that lack these links — primarily in the US and China, including JPMorgan, Morgan Stanley, Goldman Sachs, State Street, Bank of Communications, and ICBC — fall behind regulatory expectations and peers. 

How Well Are G‑SIBs Integrating Climate Risk Into Their Core Strategy? 

Most G-SIBs demonstrate adequate or strong alignment between their climate strategies and relevant frameworks, reflecting the influence of TCFD, BCBS guidance, and EBA expectations. Just over half of G-SIBs qualify as best-in-class, with clear approaches to identifying and managing climate risks. Two banks — Mitsubishi UFJ Financial Group and ICBC — show weak alignment, indicating a lack of robustness in terms of climate risk strategy and management. EU regulators expect banks to assess material climate risks and integrate findings into strategy, capital planning, and risk appetite.  

Are Banks Using Climate Scenario Analysis to Strengthen Resilience? 

According to Morningstar Sustainalytics data, three out of the 29 G-SIBs have very strong or strong performance in terms of their Low Carbon Transition Resilience Programme. This metric focuses on financial institutions’ climate assessments and considers whether financial companies use them to understand the impact on their business and update their strategy, business plans, and financial planning in line with the TCFD’s recommendations on resiliency. Supervisory authorities increasingly require financial institutions to incorporate climate-related risks within their scenario analysis and stress-testing frameworks to enhance the assessment of vulnerabilities within their portfolios. 

Figure 2. Top 10 G-SIBs Based on Carbon Transition Resilience Programme Performance 

_{Source: Morningstar Sustainalytics. Data as of September 11, 2025.}

Based on the outputs of climate-related scenario analyses (e.g., the Network of Central Banks and Supervisors for Greening the Financial System’s climate scenarios), financial institutions should allocate economic capital to either credit, market, or operational risk.² The EBA expects banks to integrate into their internal capital adequacy assessment process (ICAAP) a forward-looking view of their capital adequacy under adverse scenarios that includes environmental and climate risks among traditional ones such as credit, interest rate, or concentration risk. They must also specify changes to their business plan or other measures derived from climate stress testing. Although 14 out of 29 G-SIBs have started integrating climate into their capital adequacy assessments, there is limited quantitative disclosure of the impact of climate risks on capital.  

Table 1. Climate Integration in Capital and Liquidity Adequacy Among the 29 G-SIBs

_{Source: Corporate disclosure. Data as of November 2025.}  

_{Note: The italicized banks represent the strongest performers in terms of capital and liquidity measures.}

Additionally, EU banks are expected to integrate climate risks, among other ESG risks, into their internal liquidity adequacy assessment process (ILAAP), which is used internally to identify, measure, and manage liquidity adequacy under adverse scenarios.3 Based on corporate disclosure, eight out of the 29 G-SIBs use outcomes of their climate scenario analysis to inform their internal liquidity adequacy planning. Best-in-class peers include Deutsche Bank and BPCE, which conduct ad hoc climate stress analysis to reflect the impact of climate risk drivers on liquidity flows.

How Strong Climate Management Can Support Long‑Term Value for Banks

In the medium term, large EU and UK banks may face greater regulatory scrutiny that could translate into additional operational complexity, further investment, and higher compliance costs. Nevertheless, sustainable performance is built over the long term. The identified leaders among the 29 G-SIBs, as shown in Figure 1, appear to be well positioned over the long term to reduce compliance costs, build trust with regulators and investors, and mitigate climate-related financial risks. This progress could ultimately benefit their bottom line and strengthen the resilience of their business model.