meta_id 3302879

On June 15, 2026, the European Central Bank (ECB) introduced climate factors into its collateral framework to address financial losses linked to climate change. The climate factors ensure that firms' vulnerability to transition shocks are considered when assessing the value of corporate bonds used as collateral in lending to banks. The ECB lends money to banks to steer short-term interest rates and maintain inflation close to its target. To mitigate financial risks when granting these loans, the ECB requests high-quality collateral and applies risk control measures including "haircuts"—reductions in the value assigned to collateral assets to maintain a safety buffer. Climate change introduces unprecedented and potentially severe economic consequences that may not be reflected in historical price data used to calibrate asset haircuts. Unexpected transition shocks linked to the move towards a low-carbon economy can affect firms' business models, profitability, and asset values. Climate factors further reduce the value the ECB assigns to certain corporate bonds depending on the issuer's exposure to climate-related uncertainties. The ECB constructs an uncertainty score for each corporate bond using a two-step approach. The score comprises three components: stressor (potential impact of a transition shock on financial asset values by sector); exposure (assessed at firm level using greenhouse gas emissions, decarbonisation targets and climate disclosures); and vulnerability (represented by the square root of the asset's residual maturity). Bonds issued by firms with higher emissions, weaker transition plans or less comprehensive climate disclosures, as well as bonds with longer residual maturities, receive higher uncertainty scores. In the second step, uncertainty scores are transformed into climate factors rescaled to vary within a narrow range set by the ECB's Governing Council. Climate factors represent an additional reduction in collateral value on top of regular valuation haircuts. The ECB's Governing Council will regularly review climate factors to reflect new data, regulatory developments and advances in risk assessment capabilities.