ECB Official Warns of ‘Chronic’ Climate Risk as Weather Shocks Mount

The European Central Bank’s top climate official says a pattern is emerging whereby the cumulative impact of extreme weather shocks is morphing into its own risk category.

There is a “chronic impact that is slowly surfacing,” Irene Heemskerk, head of the Climate Change Centre at the ECB, said in an interview. “It can lead to second-round effects and value chain disruptions or even hitting the productivity of people.”

It’s a similar warning to one recently offered by an executive at BlackRock Inc., as so-called chronic climate risk draws increasing attention. The phenomenon describes a world in which the financial and economic losses tied to acute weather shocks such as floods, wildfires or droughts keep recurring at a pace that makes it ever harder to guard against them in future.

This summer’s relentless heat waves have added urgency to the need for measuring new and evolving financial risks associated with climate change. While the short-term effects are plain to see, the longer-term distortions can be more difficult to monitor. And according to Louise Kooy-Henckel, BlackRock’s global head of sustainable and transition solutions, chronic risks aren’t being priced in by markets.

The implications for asset valuations and policymaking may be considerable. Economists have already warned that Europe’s gross domestic product will suffer a blow this year due to the fallout of extreme weather fueled by climate change. And for institutional investors overseeing long-term allocations, the need to take such risks into account is growing.

The European Union last year dropped a proposal to mandate climate transition plans and slashed the number of entities that must report sustainability metrics after pushback from businesses. Still, Heemskerk said firms should voluntarily disclose, because climate risks will inevitably factor into how their assets will be valued, when pledged as collateral.

To protect its own balance sheet from climate change risks, the ECB is rolling out haircuts of as much as 5% on collateral that banks post to access its liquidity facilities. It began in June with transition risks to bonds and, from next year, will extend the policy to credit claims. Haircuts for physical risks may be considered in the future.

“If more and better data becomes available, if we get more information, we will reassess,” Heemskerk said. “We need to do our job properly.”

Speaking earlier this month in Hong Kong, BlackRock’s Kooy-Henckel said that for investors, the management of so-called acute climate risks is “very different” from how to go about handling chronic risks.

Sudden catastrophes are “short and sharp, and the best investment strategy there is to prepare and maybe think about repair,” she said. “The other one is radical, over a long period of time, and it’s typically much harder to price.”

Heemskerk says that “singling out the impact of one specific physical extreme weather event on the economy risks missing the full picture.” Ultimately, this is “really an all-economy risk that we see emerging.”

The continual rise of emissions is exacerbating chronic climate risks. Earlier this month, the United Nations warned that the current pace of emissions means it’s now virtually inevitable that the world will surpass the critical threshold of 1.5C of warming.

What’s clear is “the longer we wait to reduce carbon emissions, the higher the impact will be,” Heemskerk said. “But the transition trajectory and the speed is in the end a political decision, and from a central banking perspective, we can continue to do what we can do and we’ll continue to coordinate with the people who are willing to do so.”

With floods and fires expected to worsen, the outlook for the entire economy is deteriorating, she added.

“We never thought that this would’ve been so extreme by now already,” Heemskerk said. “It’s developing quicker than science has predicted.”

Photograph: Louvre Museum during heat wave in Paris on June 26, 2026. This summer’s relentless heat waves have added urgency to the need for measuring new and evolving financial risks associated with climate change; photo credit: Benjamin Girette/Bloomberg

Related: