ECB will consider ‘climate factor’ when lending to banks from next year

The European Central Bank (ECB) is introducing a ‘climate factor’ which could reduce the value of collaterals pledged by banks for loans, starting in the second half of 2026. 

ECB says the new measure will allow it to better manage the financial risks related to the climate crisis by protecting Eurosystem, the eurozone’s monetary authority, against potential decline in the value of collateral in case of adverse climate-related transition shocks.

The decision made today by the ECB’s Governing Council follows climate stress tests performed on the Eurosystem balance sheet, which showed that the value of financial assets can be directly affected by climate change-related uncertainties. “If a counterparty defaults, the Eurosystem assumes ownership of the collateral, which must then be liquidated over time. Any unexpected drop in value caused by a climate shock could therefore result in financial losses for the Eurosystem,” ECB explains in an FAQ sheet on the new ‘climate factor’.

The Eurosystem’s refinancing operations are a key instrument in maintaining price stability, and the ECB expects its climate factor to act as a buffer against the possible financial impact of uncertainties related to climate change. It will consider forward-looking climate scenario analyses to better value assets offered by banks as collateral for refinancing loans, ensuring that adequate collateral remains available and improving Eurosystem’s resilience.

How the climate factor will work

Under the new measure, each asset pledged as collateral will be assigned an ‘uncertainty score’ composed of three elements: a uniform, sector-specific stressor derived from the Eurosystem climate stress test, an issuer-specific exposure factor, and an asset-specific vulnerability, based on how sensitive the asset’s market price is to unexpected future climate shocks.

The uncertainty score will then be applied to the assets to adjust their collateral value, complementing existing risk management tools. This, in turn, could reduce the liquidity available in refinancing operations for banks pledging assets with high uncertainty scores as collateral.

This measure is due to be implemented in the second half of 2026, and will be regularly reviewed by the ECB’s Governing Council to reflect the increasing availability of data and models, as well as relevant regulatory developments and advances in risk assessment capabilities.