Eurocentral Bank expands asset constraints to incorporate climate considerations in asset eligibility
The European Central Bank (ECB) has taken a significant step towards addressing climate risks in its operations, announcing plans to green its collateral framework. This update was made on July 31, 2025.
The ECB's new climate factor, to be implemented in the second half of 2026, will focus on assets issued by non-financial corporations and events associated with the green transition. This decision comes after the ECB's climate stress tests showed that financial assets, including those accepted as collateral, can be affected by climate change.
Bruno De Conti, a senior researcher at Positive Money Europe, considers this announcement an important step towards the ECB fulfilling its primary mandate of price and financial stability. He notes that it can be expensive to be a part of the green transition, and the ECB has the ability to play a part in this process.
The ECB's climate factor is based on a combination of stressor or market factors, as well as a measure of the issuer's exposure to green transition uncertainties and how sensitive the market price of the assets is to a sudden climate shock. This factor will be used to reduce the value assigned to assets pledged as collateral, thereby helping to buffer against any future financial risks from climate change.
Clarisse Murphy, central banks campaigner at Reclaim Finance, stated that the ECB needs to ensure the climate factor lowers the value of all carbon-intensive assets, such as oil. She believes this move marks a significant step in integrating forward-looking climate considerations into the ECB's risk management and policy toolkit.
Dominyka Nachajute, sustainable finance policy officer at WWF EU, finds it encouraging that the ECB is incorporating climate measures, especially when other climate ambitions are being rolled back. She also noted that the move sends a powerful signal to the broader financial community to integrate climate risk into core risk management.
Advocates have welcomed the ECB's decision to include climate in its collateral framework, as they have been pushing for this change for several years. The ECB's decision to green its collateral framework was first announced in 2021 and delayed until July 2024. The ECB's climate factor will be regularly reviewed by the ECB's governing council.
If a financial institution defaults as a result of climate change, it could lead to financial losses for the wider Eurosystem. By greening its collateral framework, the ECB aims to mitigate such risks and contribute to a more sustainable financial system. The ECB's new climate factor is a testament to its commitment to addressing climate change and ensuring financial stability in the long term.
