The Role of Central Banks’ Credit Rating in Mitigating Climate and Environmental Risk

This joint report from analysts at Positive Money Europe and WWF examines the credit assessments of the Eurosystem’s collateral framework. It proposes a list of climate and biodiversity metrics that national central banks can use to integrate climate and environmental considerations into their asset ratings, offered as security for loans under the system.

Following a review of the framework, the study examines the three different rating sources currently used and finds that in-house credit assessments made by euro area national central banks offer the most effective way to introduce climate and environmental criteria into the process. The analysis shows that in-house assessments are highly suitable for integrating climate risk because they are potentially less biased and more consistent than those of private sector ESG providers, and are particularly useful for assessing SMEs.

The report also includes a detailed examination of the in-house rating methods practiced by the Banque de France and Banco de España, showing that it is already possible to integrate non-financial information into credit ratings using a qualitative approach to fill data gaps.

The authors propose a short list of relevant metrics and possible methods through which national central banks can include climate and environmental risks into their evaluation of assets offered as collateral under the Eurosystem framework. These include emissions targets, energy use, physical climate risk assessments, incentive structures and biodiversity indicators.

The report concludes with the recommendation that, in the short term, the European Central Bank and national central banks develop a common, standardised approach to assess environmental risks and help support the EU’s sustainability agenda, beginning with the most damaging sectors.

It ends with medium-term recommendations including lengthening forecast horizons, expanding in-house credit assessments to all Eurosystem central banks, and the inclusion of all SMEs.