In an effort to address climate-related financial risks, the European Central Bank (ECB) is introducing a climate factor in its collateral framework, starting in the second half of 2026.
This landmark measure will allow the ECB to reduce the value assigned to assets pledged as collateral based on their exposure to climate-related transition risks, thereby strengthening the Eurosystem’s resilience against climate-related transition shocks.
“At a time when a lot of the climate and environmental ambition is being rolled back, it is encouraging to see the ECB finally incorporating climate into its collateral framework, one of the most powerful levers of monetary policy,” said Dominyka Nachajute, Sustainable Finance Policy Officer at WWF EU. “Through this move, the ECB is translating its recognition of climate change as a material financial risk into concrete monetary policy implementation. This marks a significant step in integrating forward-looking climate considerations into the heart of the ECB’s risk management and policy toolkit. It also sends a powerful signal to the broader financial community to integrate climate risk into core risk management, underscoring that high-carbon assets are inherently riskier and may face reduced collateral value.”
The climate factor, the ECB’s in-house set of metrics, will apply to non-financial corporate bonds, adjusting their value based on a score that reflects sector-specific stress, issuer-specific exposure, and asset-specific vulnerability to climate-related financial risks. Assets deemed riskier from a climate perspective could face larger haircuts, leading to greater reductions in collateral value. By adjusting the value of assets pledged as collateral based on their exposure to climate transition risks, the ECB is directly pricing this risk into its core monetary policy operations.
Now, the ECB must calibrate the climate factor carefully so as to significantly penalise the most environmentally harmful sectors, while rewarding the best environmental performers.
“While this is a major achievement for climate, it’s equally as vital that nature-related risks are also part of the ECB’s collateral framework, so that all economic vulnerabilities are adequately addressed. Following the ECB’s recent recognition of nature degradation as relevant to monetary policy in its strategy review, this seems like the natural next step,” concluded Dominyka Nachajute.
Looking ahead, we ask the ECB to explore additional measures, such as excluding harmful assets from the collateral framework altogether, setting concentration limits to the share of environmentally harmful assets allowed in a bank’s collateral portfolio, ensuring that the climate factor covers asset classes beyond non-financial corporate bonds, and working towards integrating nature-related risks and biodiversity loss into the existing collateral framework.
