On 29 July 2025 the European Central Bank (ECB) announced the introduction of a climate factor in the Eurosystem’s collateral framework. This measure is designed to address financial risks related to climate change by protecting the Eurosystem against potential declines in the value of the collateral accepted in its refinancing operations, specifically in the event of adverse climate-related transition shocks.
Why did you introduce a climate factor?
Climate stress tests performed on the Eurosystem balance sheet show that the value of financial assets can be directly affected by climate change-related uncertainties. This also applies to assets that the Eurosystem accepts as collateral in its refinancing operations. 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.
To address this risk, the Governing Council has therefore decided to introduce a climate factor. This factor may reduce the value the Eurosystem assigns to assets pledged as collateral, thereby lowering the maximum amount the Eurosystem is willing to lend against those assets. The climate factor serves as a buffer, mitigating the potential financial impact of climate-related uncertainties on collateral value.
The climate factor covers (i) individual marketable assets issued by non-financial corporations and their affiliated entities, and (ii) uncertainties linked to the transition to a low-carbon economy.
How does the climate factor work?
The climate factor may adjust the value assigned to assets pledged as collateral and may reduce the maximum amount the Eurosystem is willing to lend against them. The degree of adjustment will depend on the potential impact of transition-related shocks on an asset. Assets more exposed to these uncertainties will face steeper reductions in collateral value, while those with minimal or no exposure will be largely unaffected.
The adjustment for each asset will be determined by an uncertainty score, which is composed of three elements:
- a sector-specific stressor: a uniform “market factor” derived from the expected shortfall in the adverse scenario of the Eurosystem climate stress test, which applies to all assets issued by firms within a specific sector;
- an issuer-specific exposure: a measure of an issuer’s exposure to transition-related uncertainties, based on the methodology developed for the tilting of the Corporate Sector Purchase Programme;
- an asset-specific vulnerability: an assessment of how sensitive an asset’s market price is to unexpected future climate shocks, taking into account its residual maturity.
Based on the uncertainty score, the Eurosystem will assign a climate factor to each marketable asset within scope, which further adjusts its collateral value after the application of standard haircuts. The climate factor will complement the Eurosystem’s existing risk management tools by incorporating forward-looking climate scenario analyses.
How does the measure affect counterparties?
For counterparties, the climate factor may reduce the liquidity available in refinancing operations when pledging assets with high uncertainty scores as collateral. The overall impact will largely depend on the total liquidity that counterparties borrow from the Eurosystem and the proportion and composition of corporate bonds within their collateral pools. Given the current environment of low borrowing levels and the limited use of corporate bonds as collateral, the effect of the climate factor on counterparties is expected to be limited.
More generally, the Eurosystem will ensure in the calibration of this measure that its ability to implement monetary policy through broad collateral availability will remain intact. This is preserved through the proportionate calibration of climate factors and because counterparties will retain their full ability to choose which assets to hold and mobilise as collateral for Eurosystem operations.
When will this measure be implemented?
The climate factor is expected to be implemented in the second half of 2026. This timeline allows for the necessary updates to the Eurosystem’s collateral management systems and amendments to several legal acts. The final calibration of the measure will also depend on the latest climate data, which are expected to become available in the first quarter of 2026.
Further details on the climate factor will be provided closer to the implementation date. The climate factor, including its scope and calibration, will be regularly reviewed by the Governing Council to account for the increasing availability of data, relevant regulatory developments and advances in risk assessment capabilities.
The announcement of the climate factor is consistent with the outcome of the ECB’s 2025 monetary policy strategy assessment and follows up on the July 2024 announcement to develop alternative approaches to the climate change collateral pool concentration limits.