The European Central Bank (ECB) today announced that it will apply a “climate factor” to assets submitted as collateral by banks looking to borrow from the Eurosystem.
It said the move was aimed at protecting the Eurosystem, as the value of collateral from counterparties in its refinancing operations was sensitive to climate change-related uncertainties.
The climate factor could reduce the value assigned to eligible assets pledged as collateral, which the ECB said “acts as a buffer against the possible financial impact of uncertainties related to climate change”.
“It will complement the Eurosystem’s existing risk management toolbox by considering forward-looking climate scenario analyses and therefore improve the resilience of the Eurosystem’s monetary policy implementation,” the ECB added.
It said the climate factor will be calibrated according to sector-level data on non-financial corporate bonds in the Eurosystem’s 2024 climate stress test, a Eurosystem-specific issuer climate score, and the asset’s residual maturity.
The measure is due to be implemented in the second half of 2026.
The ECB said it will be regularly reviewed by the Governing Council to reflect the increasing availability of data and models, as well as relevant regulatory developments and advances in risk assessment capabilities.
In 2022 the ECB announced the incorporation of climate change considerations in the Eurosystem’s corporate bond buying programme and the then ongoing pandemic emergency purchase programme.
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