ECB adds climate to its collateral framework

The European Central Bank (ECB) has added a climate factor into its collateral framework to better manage financial risk from climate change.

The collateral framework gives banks the means to pledge assets to guarantee loans. Eligible assets are determined by EU national central banks under criteria set out by the Eurosystem.

Climate stress tests show that financial assets, including those accepted as collateral, can be affected by climate change. That means if a financial institution defaults as a result of climate change, it could lead to financial losses for the wider Eurosystem.

The ECB first announced its intention to green its collateral framework in 2021 but delayed the changes in July 2024.

The new climate factor would reduce the value assigned to assets pledged as collateral, depending on how the assets could be impacted by climate risk. This will help buffer against any future financial risks from climate change, the ECB announced.

The adjustment is based on stressor or market factor, as well as a measure of the issuer’s exposure to green transition uncertainties and how sensitive the market price of the assets is to a sudden climate shock.

The climate factor will focus on assets issued by non-financial corporations as well as events associated with the green transitions. It will be implemented in the second half of 2026 and be regularly reviewed by the ECB’s governing council.

‘A significant step’ in integrating climate considerations

Advocates welcomed the announcement, as many had been pushing for the ECB to include climate in its collateral for several years. Still, the ECB needs to make sure that the climate factor lowers the value of all carbon-intensive assets such as oil, said Clarisse Murphy, central banks campaigner at Reclaim Finance.

“The European Central Bank’s decision to finally act on its collateral framework sends a powerful message: carbon-intensive assets, like fossil fuels, are less reliable guarantees,” she said.

Dominyka Nachajute, sustainable finance policy officer at WWF EU said it was encouraging that the ECB was incorporating climate measures when a lot of other climate ambitions were being rolled back.

“This marks a significant step in integrating forward-looking climate considerations into the heart of the ECB’s risk management and policy toolkit,” Nachajute said. “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.”

Bruno De Conti, a senior researcher at Positive Money Europe, said the announcement was an important step towards the ECB fulfilling its primary mandate of price and financial stability but it could be expanded to include biodiversity loss and ecosystem collapse.

“Changes to the collateral framework are a good start, but the ECB needs to go further and offer lower borrowing rates to businesses operating in more sustainable industries. It can be expensive to be a part of the green transition and the ECB is able to play its part – and it should.”