© ECB
The European Central Bank’s (ECB) climate collateral factor signals a fundamental shift in monetary policy, as the Bank of England (BoE) draws criticism for failing to update its climate stress testing since 2021, and UN research highlights Brics countries’ potential to reshape global climate finance architecture.
Banks must adapt risk models or face rising costs from ECB climate factor
Industry experts have urged financial institutions to overhaul risk management systems following the ECB’s decision to introduce a climate factor into its collateral framework.
The central bank will implement climate-differentiated collateral haircuts in the second half of 2026. This move “marks the end of the idea that monetary policy can remain neutral in the face of systemic climate risk”, wrote Scott Kelly, senior vice-president of environmental analytics at Risilience, in an article for Sustainable Views.
Kelly warned that “few financial institutions” have yet to integrate “transition risk into bond pricing, collateral valuation or funding models”. Banks holding debt with high climate exposure should take swift action to reassess their collateral pool and avoid rising costs, says Kelley. He also urges firms to remove climate risk from sustainability silos and conduct forward looking analysis using firm-level data when re-financing.
“The adjustment … creates an incentive to move capital away from companies misaligned with decarbonisation,” Kelly wrote, noting financial markets already penalise high-emitting companies by 20-30 basis points on debt costs. Clients with robust transition plans are “best-placed” to minimise the impact of the new rules.
He further suggested other central banks are “likely” to follow the ECB template.
UN releases Brics-led climate strategy to address funding gaps
The UN Conference on Trade and Development (UNCTAD) has released a comprehensive framework for Brics countries to leverage their collective economic weight to create new climate finance frameworks. This is key, according to UNCTAD, given inadequate global flows and high barriers global south nations face in accessing affordable climate finance amid rising debt and declining development finance.
The authors argue Brics nations – representing nearly half the world’s population and 28% of global GDP – can offer a compelling alternative by prioritising development, national sovereignty, resilience and mutual prosperity.
“The inadequacy of current financial flows is not merely a technical issue – it is a profound equity challenge that threatens to derail global climate and development goals,” UNCTAD stated.
The strategic research identifies four key pillars for Brics climate finance coordination: increasing availability through institutions, strengthening coordination between global south countries, building resilience to systemic shocks, and advocating for broader global economic governance reforms.
Bank of England faces criticism for climate risk inaction
The BoE has drawn sharp criticism from environmental group WWF for failing to advance climate risk work despite identifying climate change as a threat to the UK financial system.
WWF has urged the BoE to update scenario analysis not repeated since its 2021 Climate Biennial Exploratory Scenario (CBES), despite methodological advances since then. Nitika Agarwal, head of sustainable finance at WWF, told Environmental Finance that “the work they’ve done is foundational only and that absolutely cannot be the extent of central bank action on climate”.
A BoE spokesperson confirmed the institution will not redo CBES, stating it intends to use its process for “exploratory” analysis on other topics. However, the central bank did not confirm whether it would run economy-wide climate analysis in another form.
Agarwal noted that while the bank may have felt its climate mandate constrained under the previous government, the current administration’s clear climate strategy removes those constraints. She emphasised that climate analysis “should play an informative role to the Treasury and to parliamentarians” and implied the central bank has a responsibility to facilitate this.
Insurance sector must shift to anticipatory action model
Insurance insiders want to see the industry shift from reactive to anticipatory action as climate-related losses surge and the protection gap widens dramatically.
Insured losses from natural catastrophes reached US$154bn in 2024, well above the 10-year average, according to Gallaher Re research. Yet nearly 70% of global economic losses from natural disasters remain uninsured globally, with that figure rising to over 90% in low-income countries.
“We are not closing the protection gap – we’re watching it widen,” Amir Sethu, head of sustainability at MS Amlin, wrote in a column for Environmental Finance.
He advocated for forecast-based and locally owned, early action models that use pre-arranged financing and credible forecasts to trigger interventions before disasters strike. Sethu highlighted successful examples including Bangladesh’s forecast-based flood response which arrived four days earlier than usual and cut asset losses by 50%.
However, he stressed that insurance alone cannot close the gap – it “must be paired with prevention”. He suggested that insurers can help by convening multistakeholder groups, bringing together local academics, banks, governments and NGOs to proactively address the root causes of climate exposures.
Somalia launches national climate fund pilot
Somalia has launched a climate finance trial to pilot the use of funds from its National Climate Fund (NCF) for climate mitigation and community adaptation.
The NCF brings together diverse funding sources and this development marks the country’s first whole-of-government approach to climate finance coordination.
The initiative followed a two-day workshop bringing together 60 senior representatives from government agencies, environmental organisations and the business community. At the conference, officials launched a roadmap for addressing climate finance gaps, stressing the importance of transparency and accountability to attract resources from multilateral climate funds.
Finance minister Bihi Iman Egeh, who chairs the NCF board, told attendees that “mobilising and managing climate finance through the National Climate Fund will not only enable us to respond more effectively to these urgent challenges but also allow us to plan for a more resilient and sustainable future”.
Call for comments
- The Hong Kong Monetary Authority has launched a public consultation on the next phase of the Hong Kong Taxonomy for Sustainable Finance. The updated framework expands coverage to six sectors, adds criteria for transition activities and introduces a climate change adaptation category. Feedback will help refine the taxonomy’s role in scaling up green and sustainable finance.
- The Organisation for Economic Co-operation and Development is holding a public consultation on how investment agreements can positively contribute to climate and environmental goals. The consultation focuses on ways treaties could support green investment and Paris Agreement alignment. The deadline for submissions is 25 September 2025.
This page was last updated September 9, 2025
Written by
Ike Walker, a Green Central Banking contributor since 2023, has a decade's experience in research writing. An Utrecht-based scholar, Ingrid specialises in transformative justice, green finance, law and systems change. They are an Utrecht University's Bright Minds scholar and previously worked for Cambridge University and various justice-based NGOs.
