Climate factors: how the ECB tackles climate uncertainty in its collateral framework

7 July 2026

By Dirk Broeders and Daniel Gybas

On 15 June 2026 the ECB introduced climate factors into its collateral framework. This means that uncertainties related to climate change are now an additional consideration in assessing how much banks can borrow when they use corporate bonds as collateral. Climate factors complement existing risk control measures by protecting the ECB’s balance sheet against unexpected climate transition shocks. They will be regularly reviewed to reflect new data, regulatory developments and advances in risk assessment capabilities.

The ECB lends money to banks to steer short-term interest rates. This ultimately helps keep inflation close to our target. To mitigate financial risks when granting these loans, the ECB requests high-quality collateral. But even this collateral can be exposed to risks. And that is why the ECB applies a number of risk control measures to protect itself against financial loss. A prominent feature of the collateral framework are “haircuts”: when deciding how much banks can borrow, the ECB lowers the value it assigns to collateral assets. In this way, it maintains a safety buffer between the market price of an asset and the amount of money a bank can borrow against that asset.

Climate change introduces unprecedented, uncertain and potentially severe economic and financial consequences for firms that may not be reflected in the historical price data that is used to calibrate asset haircuts. For example, unexpected transition shocks linked to the move towards a low-carbon economy can affect firms’ business models, profitability, and the value of the assets they hold. Such shocks may occur in reaction to changes in climate policies, technological developments and shifting consumer preferences. As a result of a transition shock, the value of financial assets issued by exposed companies could fall below the post-haircut value hitherto assigned to those assets . That is why climate factors further reduce the value the ECB assigns to certain corporate bonds used as collateral, depending on the issuer’s exposure to climate-related uncertainties. Put simply, if a corporate issuer is more exposed to future climate transition shocks, a bank may be able to borrow less against the same value of bonds. Given the current environment of low borrowing levels and the limited use of corporate bonds as collateral, the immediate effect of climate factors on banks is expected to be limited.

Climate factors are designed in two steps

Because many of the future effects of climate change are unprecedented, the ECB cannot simply rely on historical data to assess their potential impact. Instead, it carries out a forward-looking scenario analysis, using a two-step approach.

In the first step, the ECB constructs an uncertainty score for each corporate bond that banks can use as collateral. This score does not measure climate uncertainty directly. However, it allows assets that are more or less sensitive to climate shocks to be identified. This score is the product of three components: stressor, exposure and vulnerability.

The stressor component captures the potential impact of a transition shock on financial asset values for different sectors; for example, a shock would likely have a stronger financial impact on the carbon intensive utility sector than on the software and services sector. Compared with a baseline scenario without such a shock, the stressor measures how asset values decrease at the sector level and can be understood as a common “market factor” applied to all firms in the same sector.

Exposure is assessed at firm level, using information on greenhouse gas emissions, decarbonisation targets and the quality of climate-related disclosures. Within the same sector, firms differ in how well they are aligned with the transition to a low-carbon economy. The exposure component therefore measures how sensitive an individual firm is to sector-level shocks.

Vulnerability is assessed at asset level and is represented by the square root of the asset’s residual maturity. Longer‑dated securities are treated as more vulnerable to shocks because a larger share of their cash flows is exposed to future transition developments.

Together, these three components determine how sensitive a bond is to transition shocks (see Chart 1). Depending on sector-level characteristics, bonds issued by firms with higher emissions, weaker transition plans or less comprehensive climate-related disclosures – as well as bonds with longer residual maturities – receive higher uncertainty scores and are therefore treated as more exposed to transition uncertainty.

In the second step, the asset-specific uncertainty score is transformed into a climate factor. Uncertainty scores are absolute numbers that can, in theory, reach very high levels. Because this is not practical for risk management purposes, the climate factors are rescaled to vary in a narrow range which is set by the Governing Council. This step ensures that uncertainty scores are translated into figures that have the same effect as traditional valuation haircuts and lower the assigned collateral value specifically for climate-related uncertainties.

As a result, climate factors represent an additional reduction in the collateral value assigned to the asset. This comes on top of the regular valuation haircuts applied under the existing collateral framework.

To illustrate how this works, let’s take a simple example: suppose a bond has a market value of €100, a standard valuation haircut of 10% and a climate factor of 0.978. The amount of liquidity the bank can receive for this bond is therefore 100 × (1 − 0.10) × 0.978 = €88, instead of the €90 it would have been able to borrow before the introduction of the climate factor.

Chart 1 gives an overview of how climate factors are constructed.

Chart 1

Climate factors and their building blocks

Climate factors are calibrated to reduce the ECB’s exposure to transition uncertainty while ensuring that banks have enough collateral to participate in monetary policy operations. In the initial design, the reduction in collateral value is capped at a certain maximum for assets that are the most sensitive to unexpected transition shocks. This is based on findings from the ECB’s latest climate stress test. The utility, materials and transportation sectors tend to have low climate factors, reflecting their high transition exposure, capital intensity, regulatory sensitivity and reliance on fossil fuels. A low climate factor reflects high uncertainty and implies a relatively large reduction in collateral value. By contrast, software and consumer services tend to have high climate factors, as this industry is less dependent on fossil fuels and hence less exposed to transitions shocks. At the same time, differences within sectors are substantial, because issuer emissions, transition plans, disclosures and bond maturities can vary widely. Chart 2 shows how uncertainty scores vary across economic sectors and the universe of mobilised bonds issued by non-financial corporations. High uncertainty scores translate into relatively high reductions in the value assigned to collateral.

Chart 2

Uncertainty score distribution across GICS sectors

Climate factors: an addition to the toolkit for addressing climate-related uncertainties

Climate factors are designed to complement the ECB’s existing collateral risk controls. Regular valuation haircuts are well suited to covering financial risks observed in the historical data used to calibrate them. At the same time, they are less able to capture potential climate shocks, as historical data on such shocks are limited. Climate factors therefore add a forward-looking, precautionary overlay to collateral valuations, helping account for climate-related uncertainties that may not be reflected in regular valuation haircuts.

Climate factors also differ from the ECB’s regular credit risk assessments. Credit ratings and probabilities of default focus on the likelihood that a bond issuer will fail to meet its obligations. By contrast, climate factors focus instead on how the market value of an asset may change due to climate-related uncertainties. In this sense, they do not double-count the impact of climate transition shocks on default risk but address a different channel through which climate uncertainty can affect collateral value. They therefore add one more instrument to the toolkit for addressing financial risks.

As climate risks evolve, so will the newly introduced climate factors. Following their introduction on 15 June, the ECB’s Governing Council will regularly review the climate factors, including their scope and calibration. In this way, we can ensure that we account for the increasing availability of data, relevant regulatory developments and advances in risk assessment capabilities.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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