The European Central Bank (ECB) has unveiled a new initiative to strengthen climate risk management within the Eurosystem by introducing a “climate factor” into its collateral framework. This move aims to safeguard the central banking system from the potential devaluation of collateral triggered by climate-related transition shocks.

This climate factor may lead to lower valuations of assets deemed vulnerable to transition risks, thereby reducing the amount the ECB is willing to lend against them. The decision follows climate stress tests on the Eurosystem balance sheet, which revealed that asset values could be significantly impacted by climate-related uncertainties, potentially causing financial losses in the event of abrupt market adjustments.

The measure is part of the ECB’s broader climate strategy, initiated in 2022, which also includes the gradual decarbonisation of its corporate bond holdings and the introduction of climate-related disclosure requirements for eligible collateral.

Under this new framework, assets used as collateral in refinancing operations will be assigned a climate factor based on an “uncertainty score.” This score will be calculated using sector-level data, issuer-specific climate exposure, and asset-level vulnerability assessments.

The ECB plans to roll out the climate factor in the second half of 2026, initially covering marketable assets issued by non-financial corporations and their related entities, with a focus on transition risks in the shift to a low-carbon economy.

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