European Central Bank Integrates Climate Transition Risks into the Framework for Collateral Valuation
The European Central Bank (ECB) has announced plans to incorporate a new climate factor into its monetary policy framework, aiming to manage climate risks within the EU's central banking system, known as the Eurosystem [1]. This initiative is expected to be implemented in the second half of 2026.
The new climate factor is designed to address uncertainties linked to the transition to a low-carbon economy. It will be based on an uncertainty score, which will be composed of sector-level data, an issuer-specific exposure metric, and an asset-specific vulnerability assessment [2].
Each marketable asset issued by non-financial corporations and their affiliated entities will be assigned a climate factor by the Eurosystem. This could potentially reduce the value assigned by the Eurosystem on assets exposed to climate transition risks, similar to what was mentioned earlier. As a result, the new climate factor could lower the amount that the Eurosystem would be willing to lend against those assets [3].
The ECB has introduced climate-related disclosure requirements for collateral, ensuring transparency and accurate assessment of climate risks [4]. This move follows climate stress tests performed on the Eurosystem balance sheet, which indicated that the value of financial assets can be directly affected by climate change-related uncertainties [5].
The ECB's new initiative also includes the decarbonization of its corporate bond portfolio over time [6]. The unexpected drop in value caused by a climate shock could result in financial losses for the Eurosystem, and the new climate factor is intended to mitigate these risks.
The launch of the new climate factor follows a timeline announced on 29 July 2025, allowing for the necessary updates to the Eurosystem's collateral framework to address financial risks related to climate change and protect against potential declines in collateral value due to climate-related transition shocks [1].
[1] European Central Bank Press Release, 29 July 2025. [2] European Central Bank, "Climate Change and the Eurosystem Collateral Framework", 2022. [3] European Central Bank, "Managing Climate Risks in the Eurosystem", 2022. [4] European Central Bank, "Climate-Related Disclosure Requirements for Collateral", 2025. [5] European Central Bank, "Climate Stress Tests on the Eurosystem Balance Sheet", 2024. [6] European Central Bank, "Decarbonization of the Eurosystem's Corporate Bond Portfolio", 2026.
- The ECB's intention to decarbonize its corporate bond portfolio over time aligns with the broader objective of reducing carbon emissions in the industry, contributing to global decarbonization efforts in the fight against climate-change.
- The new climate factor developed by the ECB will be grounded in science, utilizing sector-level data, issuer-specific exposure metrics, and asset-specific vulnerability assessments from environmental-science to gauge climate risks associated with each marketable asset.
- Incorporating the new climate factor into its monetary policy framework, the ECB aims to encourage businesses to adopt greener practices and finance ventures that promote reduce carbon emissions, mitigating climate-related financial risks and preserving environmental sustainability.
