Frank Elderson, ECB Executive Board Member, discusses managing climate and nature risks amid increasing uncertainty, non-linear systems, and the importance of building resilience through scenario analysis and preparedness.
Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, delivered a keynote speech at the ECB-Bank of England Conference on supervising climate risk in a non-linear world.
The conference gathered experts from 18 countries across three continents to discuss how to ensure resilience in an increasingly complex and interconnected environment.
Elderson highlighted that traditional risk management relies on stable relationships and historical data, but current macro trends such as geopolitical fragmentation, demographic change, artificial intelligence, and climate crises are creating non-linear and uncertain risks that challenge these assumptions.
He explained the distinction between risk and uncertainty, referencing Frank Knight and John Kay, emphasizing the importance of understanding known knowns, known unknowns, and unknown unknowns in climate and financial risks.
Progress has been made in identifying and quantifying known risks, including better data and models for climate impacts, but many risks remain forward-looking and difficult to quantify due to their complex, interconnected nature.
Scenario analysis is a key tool to explore plausible futures, but it has limitations, especially in capturing tail risks and feedback loops. Continuous improvement, local context, expert judgment, and transparency are essential for effective use of scenarios.
Radical uncertainty, where outcomes and interactions are unknown, requires building resilience before shocks occur. This includes maintaining sufficient capital, liquidity, operational capacity, and strategic flexibility, as well as testing response functions regularly.
The insights from climate risk management are applicable to other macro trends such as technological innovation, demographic shifts, and geopolitical risks, all characterized by uncertainty and non-linearity.
In conclusion, risk management must evolve from measurement to preparedness and resilience building. The conference aims to deepen understanding across these dimensions to better navigate the uncertainties of the future.
Thank you for your attention and participation.
