ECB Sanctions for Failure to Comply With Climate Stress Tests
Since 2022, the European Central Bank (the "ECB"), acting within the framework of the Single Supervisory Mechanism (the "SSM") established by SSM Regulation (EU) No 1024/2013 (the "SSM Regulation"), has progressively integrated climate and environmental risks into its prudential expectations. In practice, the ECB does not directly sanction the outcome of a climate stress test, which is often a diagnostic and prudential dialogue exercise. Instead, non-compliance with supervisory obligations associated with these expectations—failure to transmit information, persistent delays, or non-application of requirements—is addressed by the ECB in supervisory decisions.
What breaches related to climate stress tests are prohibited? Climate stress tests organized or requested by the ECB, whether or not integrated into the prudential dialogue, may give rise to highly operational expectations regarding data quality, modeling capacity, integration into the Internal Capital Adequacy Assessment Process (the "ICAAP"), the functioning of the risk management process, and the production of forward-looking analyses. In this context, an institution may be exposed to enforcement measures not because it "fails" the stress test, but because it does not comply (or does so belatedly) with associated requirements, particularly when they are formalized in an ECB decision.
A 2025 in-depth analysis by the European Parliament on ECB banking supervision explains, with respect to climate and environmental risks, that the ECB has resorted to legally binding supervisory decisions comprising three milestones in 2023 and 2024, providing for the use of periodic penalty payments in the case of non-compliance. These three milestones were: (i) a sound assessment of materiality and the business environment by year-end 2023; (ii) the integration of climate risks into governance, strategy, and risk management by year-end 2023; and (iii) the full integration of climate risks into the ICAAP and stress tests by year-end 2024.
What types of sanctions can the ECB impose? Under the SSM, the ECB has the power to impose sanctions on institutions subject to its direct supervision, in particular to ensure compliance with prudential obligations and individual supervisory decisions. More specifically, two types of sanctions are notable.
First, Article 18 of the SSM Regulation grants the ECB the power to impose administrative sanctions when financial institutions intentionally or negligently commit a breach of a requirement arising from European Union ("EU") law. These pecuniary sanctions may amount to a maximum of: (i) twice the amount of the profits gained or losses avoided as a result of the breach (where they can be calculated); or (ii) 10% of the entity's total annual turnover.
Second, in accordance with Article 2.1(b) of Regulation (EC) No 2532/98, the ECB has a general power to impose periodic penalty payments, limited to EUR 10,000 per day of infringement over a period of six months. The rationale behind periodic penalty payments is to compel the cessation of a continuing violation of a regulation or ECB decision within the prescribed time and amount limits. Applied to a climate stress test, periodic penalty payments naturally correspond to situations, such as the late submission of required elements, the non-production of required deliverables, or the failure to implement within the prescribed deadlines an internal stress testing framework required by the ECB. In such cases, the periodic penalty payment is not so much punitive as it is incentive-based, as it aims to bring an end to a situation of non-compliance.
The ECB's "Climate" Action in its Monetary Policy Oversight
The ECB's climate and environmental action is not limited to the prudential framework, and it is therefore necessary to distinguish SSM prudential sanctions from "monetary policy" instruments under the Eurosystem Collateral Management System (the "ECMS") framework. A distinct line of reform consists of modulating collateral treatment based on climate transition risk. On this point, ECB Guideline (EU) 2026/689 of 22 January 2026 on the operational framework for monetary policy provides for the introduction of a "climate factor," as an additional risk control measure applied to certain assets pledged as collateral.
This climate factor is an additional risk control measure aimed at mitigating the potential financial impact of uncertainties related to climate transition by adjusting the value attributed to eligible marketable assets. In essence, it is an adjustment that affects the collateral value after application of the usual haircuts, based on exposure to climate transition uncertainties, using sector and issuer indicators described in methodological annex XII ter of the aforementioned guideline.
The text provides for general application from March 30, 2026, but specifies that the climate factor itself applies beginning June 15, 2026, in particular due to its technical implementation in the ECMS, which will be launched on June 15, 2026.
