In July 2025, the European Central Bank (ECB) announced its intention to include a climate factor in its collateral framework from the second half of 2026. We had the pleasure of discussing this topic with Charlotte Gardes-Landolfini, an economist at the International Monetary Fund (IMF) in the Monetary Loans Division. Charlotte is an expert in climate-related financial regulatory policy, particularly on the integration of climate-related risks into financial sector regulation and transition planning at the central bank level. Our discussions shed light on several points related to this topic, particularly methodological aspects, challenges and impacts.
Playing a key role in the European Central Bank's monetary policy, collateral is the security accepted in exchange for liquidity granted to banks during ECB refinancing operations (MRO & LTO). The eligibility framework and methodology for valuing collateral therefore has a direct influence on banks' access to money.
Until now, eligibility and valuation criteria have been based primarily on financial factors (type of security, residual maturity, credit quality, asset remuneration structure, euro denomination, etc.), which has recently been the subject of several criticisms. On the one hand, NGOs such as Reclaim Finance and Urgewald have criticised the discrepancy between these criteria and the ECB's stated climate objectives. According to these organisations, such an approach would facilitate access to debt for companies active in the fossil fuel sector, even though access to other financial vehicles (bank loans, share issues) is more difficult for them due to strict prudential supervision. Furthermore, the Eurosystem balance sheet resilience test for climate risks conducted in 2022 highlighted the significant contribution of corporate bonds to the Eurosystem's exposure to climate risks, supporting the need for a more formal framework for trading these securities.
The ECB's announcement therefore formalises a response to this dual challenge. This development marks a further step in the implementation of the ECB's roadmap for improving the consideration of climate and nature within the Eurosystem. It is part of a broader approach to integrating climate considerations into the ECB's monetary policy instruments, following on from the consideration of climate factors in corporate bond purchase operations (CSPP) introduced in 2022 and reinforced in 2023.
The ECB describes its approach in more detail in an FAQ on the climate factor. It consists of incorporating a climate factor into the valuation framework for bonds issued by non-financial companies when they are used as collateral, in order to limit the financial risks to the Central Bank's balance sheet. This climate factor should take the form of a haircut calculated on the basis of three elements:
This assesses the sector's exposure to physical and transition risks and will therefore be uniform across all assets in the same sector. According to the FAQ, this element should reflect the projected deficits for a given sector in the adverse scenario of the Eurosystem's climate stress test. Several approaches could be used to develop this sectoral component: for example, it could take the form of a scenario analysis or use a methodology such as that of Climate Policy Relevant Sectors.
The component linked to the bond issuer reflects the latter's exposure to transition risk. According to the FAQ, this element should follow the methodology developed for corporate bond purchases. This methodology takes into account the entity's greenhouse gas emissions, the implementation and monitoring of emission reduction targets, and the quality of reporting. It is also possible that alignment with a 1.5°C trajectory, adaptation measures and entities' transition plans will be taken into account in this section. The final terms and conditions are to be determined and announced by the ECB.
This element reflects changes in the value of the security in response to an unforeseen climate event (such as a carbon tax, new regulation or extreme weather event). In particular, it should take into account the residual maturity of the security, as short-term bonds are generally less exposed to future climate risks than long-term bonds. This component could draw on the work of the Financial Stability Board on methodologies for asset revaluation and abrupt losses in value, although there is little visibility on the final methodologies at this stage.
An uncertainty score will be calculated based on these three elements in order to adjust the value of the haircut applied to collateral.
The integration of climate risks into the calculation of haircuts applied to collateral could trigger the following direct and indirect effects:
The first effect is likely to be an increase in the cost of debt for companies that are highly exposed to climate risks. Indeed, the measure could almost directly lead to an increase in the bond spread of securities issued by certain companies. This effect is likely to be particularly significant for companies in the fossil fuel sectors.
A second effect could be an increase in financial players' aversion to climate risk. The introduction of a climate factor into the collateral framework may encourage financial players to favour debt securities that are less exposed to climate risk. The measure could also have a positive effect on energy security and the decarbonisation of the European energy mix by encouraging investors to finance the low-carbon energy sector.
Depending on the method used to calculate this climate factor, the ECB could strengthen the incentive for businesses to decarbonise. In particular, if the methodology gives significant weight to the targets and quality of businesses' transition plans, businesses may be more inclined to strengthen their transition efforts in order to limit the discount applied to their securities.
This choice would also reflect the growing importance given to transition plans in European regulations, as recently illustrated by the creation of a new category of ‘transition’ financial products under the SFDR. However, this effect could be mitigated by support from international investors who attach less importance to climate considerations, or by opposition from companies affected by this measure.
In addition to these direct effects, the climate factor could have decisive indirect effects. With this measure, the ECB is sending a strong signal about the importance and seriousness with which climate risks and their impact on monetary policy and reserves must be taken into account. Other central banks around the world are closely following the work, such as the Central Bank of China, the Central Bank of Central African States and the Central Bank of West African States. These central banks are likely to work in turn to develop a similar approach for their jurisdictions.
At the same time, at European level, this measure could draw attention to the physical risks to which Member States' territories are exposed. These risks are sometimes underestimated in the European Union, despite their growing materiality.
The ECB faces a number of challenges in implementing this change to the collateral framework.
The complexity of the exercise lies in particular in the numerous methodological choices required at each level of risk analysis (sector, issuer, security). There are currently a large number of concepts, indicators and methodologies for assessing the climate-related issues of financial securities: greenhouse gas emissions, carbon intensity, transition plans, avoided emissions, exposure of physical assets to physical risk, exposure to transition risk, modelling of potential climate-related financial losses, numerous scenarios (exploratory or normative, more or less pessimistic or ambitious), different time horizons (short term, medium term, long term), etc.
Developing the discount methodology therefore requires crucial technical and conceptual trade-offs. Added to this is the constraint of standardising and industrialising the method, which is essential in order to cover the specific characteristics of the large volume of assets, companies and sectors concerned.
Valuing climate risks in order to establish relevant discounts also poses a significant methodological challenge: given the considerable systemic financial implications of this measure, it is impossible to introduce elements of uncertainty.
In particular, the model developed will need to isolate the climate effect from the credit effect in order to avoid the risk of double counting, as the current discount system already takes credit risk into account. Failure to distinguish clearly between these two factors could skew the calculation of discounts, a difficulty exacerbated by the limited availability of data mentioned above.
Finally, since the objective of the ECB's climate factor is to apply a specific discount to each bond under consideration, it is essential to have comprehensive, granular and high-quality climate data, particularly on GHG emissions and issuers' alignment trajectories. The limited availability of certain ESG data and its lack of standardisation therefore represents a major challenge that must be addressed so as not to penalise certain sectors or entities of a certain size.
Furthermore, access to granular data will also be essential for financial actors to enable them to anticipate the impact of this measure and adapt their portfolios accordingly.
The integration of a climate factor into the ECB's collateral framework marks a decisive step in aligning European monetary policy with climate issues. Faced with the slowdown of the European Commission and Parliament on sustainable finance issues, the ECB is maintaining its independence and leadership. It is sending a strong signal to financial markets by increasing the cost of debt for companies heavily exposed to climate risks.
This initiative confirms the growing materiality of climate risk in bank balance sheets. It highlights the critical importance of rigorous ESG data management as a necessary condition for absorbing these new market constraints.
