Central Bank of Europe integrates climate element in its collateral mechanism, marking a significant milestone.
The European Central Bank (ECB) has announced plans to address climate-related financial risks by introducing a climate factor in its collateral framework. This move is aimed at penalising the most environmentally harmful sectors carefully and integrating nature-related risks and biodiversity loss into the existing framework.
The climate factor, set to be implemented in the second half of 2026, will directly price climate risk into the ECB's core monetary policy operations. It will apply to non-financial corporate bonds, adjusting the value of these bonds based on a score that reflects sector-specific stress, issuer-specific exposure, and asset-specific vulnerability to climate-related financial risks.
Dominyka Nachajute, Sustainable Finance Policy Officer at WWF EU, has urged the ECB to ensure that the climate factor covers asset classes beyond non-financial corporate bonds. She has also suggested setting concentration limits to the share of environmentally harmful assets allowed in a bank's collateral portfolio.
Assets deemed riskier from a climate perspective could face larger haircuts, leading to greater reductions in collateral value. In addition, Nachajute has called for the ECB to explore additional measures, such as excluding harmful assets from the collateral framework altogether.
The responsibility for accurately calibrating the climate factor metrics falls primarily on the European Central Bank itself, in coordination with EU regulatory bodies and standards for sustainability reporting. The ECB must calibrate the climate factor carefully to significantly penalise the most environmentally harmful sectors while rewarding the best environmental performances.
This initiative by the ECB is a significant step towards integrating climate considerations into monetary policy, reflecting the growing global concern over climate change and its impact on financial stability. The move is expected to encourage companies to adopt more sustainable practices and contribute to the transition towards a greener economy.
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