© ECB
The European Central Bank (ECB) is expanding the use of a climate factor in its collateral framework and has set a maximum level of reduction in loan value, it announced on Friday.
The latest update expands its climate factor that has been in effect since 15 June and applied only to non-financial corporate bonds, which make up less than 2% of pledged collateral.
The climate factor will also apply to non-financial corporate credit claims, i.e. loans, when determining the value of collateral pledged by banks, which make up 29% of pledged collateral.
The collateral framework sets out the rules under which banks can pledge assets in exchange for receiving money from central banks.
The more sensitive an asset is to climate risks, the more of a reduction it will have in its value. This is because exposure to such climate related transition shocks can affect the value of the collateral and make it more difficult to liquidate such assets as needed, the ECB explained.
Those shocks could include changes in climate policy, tech developments, shifts in consumer behaviour, litigation and broader macroeconomic adjustments.
Move sends strong signal on the cost of climate risk
What’s different is that this time the ECB specified the maximum amount of the adjustments, which was not previously disclosed when the climate factor was first announced in 2025.
The maximum reduction in the final value will be 5% for both bonds and credit claims, the ECB announced. It will not publicly disclose the climate factor for individual claims and the expanded factor will not be applied until 2027.
The climate factor for credit claims is based on three aspects: a sector-level stressor as determined by climate stress tests; a debtor’s exposures to transition-related uncertainties; and the maturity of the credit claim.
“This is an important step in strengthening the Eurosystem’s monetary policy framework by addressing financial uncertainties related to the climate transition,” Banque de France economist Carlos Mateo Caicedo Graciano wrote in a LinkedIn post.
He explained that extending the framework to include non-financial corporation credit claims “is particularly significant, as the eligible collateral mobilised in this segment is around seven times larger than the segment of eligible [non-financial corporation] bonds already covered by the climate factor”.
It’s also important for monetary policy, Graiano added, as extending the climate factor increases the relevance of the measures across the Eurosystem.
ECB expansion could go even further
The ECB is not the only central bank to have a climate factor in its collateral framework. The Bank of England (BoE) quietly announced its own version in June.
But there are key differences between the BoE and ECB. The main one is that the ECB does not outright ban certain assets from being pledged as collateral. Meanwhile, the BoE has said it won’t accept any pledges from bonds issued by companies active in coal mining.
Campaigners have been pushing for years for the ECB and others to green their monetary policy. While many have welcomed the central banks’ climate factor, some have pushed for it to go further.
As Clarisse Murphy, a central banks expert at Reclaim Finance, wrote in an op-ed for Green Central Banking, some weaknesses have been identified with the ECB’s climate factor, such as its failure to exclude the most polluting assets.
Jordi Schröder Bosch, an economist at Positive Money Europe, said the climate factor expansion was a major step forward as loans are a much bigger part of banks’ pledges as collateral.
“This closes a real gap and banks will now have to factor in climate-transition risk on far more of their lending, including loans to fossil fuel and other high-carbon firms,” he said.
Still, he lamented that the ECB will wait a year to implement the change, as Europe currently faces a barrage of heat waves and wildfires have devastated the regions of Madrid and Bordeaux.
“Organisations like the ECB can all play their part in moving away from funding polluting fossil fuel industries and we will continue to follow what they do and call for more change,” Bosch said.
Meanwhile, a report from the Centre for Economic Transition Expertise (Cetex) at the London School of Economics argues that the ECB could further extend its climate factor to other assets, such as asset-backed securities, covered bank bonds and sovereign bonds.
Enrique Serrano, a policy analyst at Cetex, said the move broadens the ECB’s climate-risk protection from an asset class barely used to one of the Eurosystem’s most important collaterals.
“While it has attracted less attention, the announcement that the maximum reduction in collateral value will not exceed 5% also reveals one of the key parameters of the climate factor, providing greater clarity and transparency about the measure’s potential impact”.
Edited on 27 July at 17:44 to add comments from Enrique Serrano.
This page was last updated July 28, 2026
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
