ECB Adapts Climate Factor for Collateral Framework to Address Climate Transition Risks

On 29 July 2025, the Governing Council of the European Central Bank (the “ECB”) announced its decision to incorporate a climate factor into its collateral framework to enhance the management of climate-related financial risks. Collateral framework refers to a set of rules that determine the assets (a specific range of marketable and certain non-marketable assets) which will be accepted as collateral for credit facilities and how they will be evaluated. The ECB's climate factor also addresses transition risks, which refer to the financial and economic effects of the shift to a low-carbon economy. Therefore, by adding a climate factor to the collateral framework, the ECB will be able to reduce the value assigned to pledged assets based on their exposure to climate-related transition shocks.

Enhancing Risk Management

According to the ECB, the value of collateral from counterparties in the Eurosystem’s refinancing operations is sensitive to climate change-related uncertainties. The said operations are significant to maintain price stability, and therefore, introducing a climate factor, which may affect the determined value of eligible collateral, will safeguard against the uncertain financial effects related to climate change. The ECB has defined the inclusion of climate change in the collateral framework as a buffer and anticipates that this factor will improve the Eurosystem's existing risk management toolkit through the use of future climate scenario analyses, thereby enhancing the implementation of monetary policy.

The climate factor will initially apply to (i) marketable assets issued by non-financial corporations and their affiliates, and (ii) uncertainties linked to the transition to a low-carbon economy.

Comprehensive Scoring System

Since the climate factor will adjust the value assigned to assets pledged as collateral, the adjustment for each asset will be determined by an uncertainty score, which is composed of three elements: (i) a sector-specific stressor, (ii) an issuer-specific exposure and (iii) an asset-specific vulnerability. According to the ECB’s announcement, its calibration will be based on individual asset characteristics, sector-level data from the 2024 climate stress test of the Eurosystem's balance sheet, the issuer's corporate sector purchase programme climate score, and the asset's remaining maturity based on assessment of the asset’s price to unexpected future climate shocks.

Climate Factor to Launch in 2026

This measure is planned for implementation in the second half of 2026 and will be reviewed regularly by the Governing Council to reflect improvements in data availability, modelling, relevant regulations, and risk assessment capabilities.

Conclusion

The ECB’s decision to add climate factor represents a strong signal to financial institutions to adapt climate risk into their risk management tools and highlights the fact that assets deemed to carry an elevated climate-related risk may be subject to more haircuts, resulting in considerable decline in their collateral value. The new climate factor is expected to solidify the difference in borrowing rates between the firms with higher carbon emissions and low carbon issuers.

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