A new study has outlined how the European Central Bank (ECB) and the Eurosystem’s national central banks can integrate climate and biodiversity-related risks into their assessment of assets offered as collateral for loans. The analysis shows how this inclusion can not only protect the Eurosystem from these risks, but can strongly influence banking and corporate behaviour in line with the EU’s sustainability agenda.
Collateral frameworks govern how central banks provide credit to banks, applying eligibility criteria for the collateral required to secure these loans. As commercial bank loans to non-financial firms make up a large share of the collateral pledged, these frameworks also have a substantial influence on non-financial corporations.
Research shows that the Eurosystem’s collateral framework has a substantial carbon bias that disproportionately favours fossil fuel and carbon-intensive companies, representing a growing risk to the ECB and national central banks. The new report shows how this risk can be mitigated, while at the same time supporting the EU’s sustainability agenda in line with the ECB’s legal duty under its secondary mandate.
Jointly published by Positive Money Europe and the WWF, the report focuses on in-house credit assessments of pledged collateral by euro area national central banks. It shows how these assessments are not more accurate and consistent than those of private sector ESG providers, but include evaluations of smaller businesses whose loans are increasingly used as collateral by commercial banks seeking ECB credit.
The authors offer a list of climate and biodiversity metrics which can be used to integrate climate and environmental considerations into collateral assessments, and make a series of policy recommendations to reduce the climate and biodiversity risks involved.
As oil and gas prices rise dramatically, awareness of the energy insecurity and price instability associated with fossil fuel use is growing. Banque de France research shows that these risks are not adequately addressed in existing collateral framework assessments.
The ECB has said it is “strongly committed” to incorporating climate change considerations into its collateral framework, and the European Parliament has overwhelmingly called on it to do so.
However so far the ECB has not acted. This comprehensive report, and its detailed and actionable proposals, offer a roadmap on how it might do so.
This page was last updated February 24, 2022
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