The European Central Bank (ECB) announced the introduction of a new measure to manage climate risk within the EU’s central banking system, or “the Eurosystem,” with plans to add a “climate factor” within the collateral framework to protect against potential decline in value of collateral in event of adverse climate-related transition shocks.
The new climate factor could potentially reduce the value assigned by the Eurosystem on assets exposed to climate transition risks, lowering the amount that the system would be willing to lend against those assets.
According to the ECB, the launch of the new climate factor 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, and that an unexpected drop in value caused by a climate shock could result in financial losses for the Eurosystem.
The new initiative forms the latest in a series of measures initiated by the ECB following a 2022 announcement that it would begin incorporating climate change considerations into its monetary policy framework, with other actions including the decarbonization of its portfolio of corporate bond holdings over time, and the introduction of climate-related disclosure requirements for collateral.
Under the new initiative, assets pledged as collateral from counterparties in the Eurosystem’s refinancing operations will have their assigned values adjusted based on an uncertainty score composed of sector-level data, an issuer-specific exposure metric, and an asset-specific vulnerability assessment. The Eurosystem will assign a climate factor to each marketable asset, based on the uncertainty score.
The ECB said that it aims to implement the new climate factor in the second half of 2026, with the factor covering individual marketable assets issued by non-financial corporations and their affiliated entities, and uncertainties linked to the transition to a low-carbon economy.
