Understanding the ECB’s new climate factor

In July 2025, the European Central Bank (ECB) announced a 'climate factor' to be added to its collateral framework, which will discount the value of assets used as guarantees by banks based on climate-related risks. The factor employs a three-tier analysis covering asset-level vulnerability (based on residual maturity), company-level transition risk (using carbon intensity and decarbonization targets), and sector-level stress (based on Eurosystem climate stress test data). While the measure aims to disincentivize the use of carbon-intensive assets, the author warns of methodological flaws in the company-level analysis—such as the use of carbon intensity over absolute emissions and a 'best-in-class' approach—that may shield some polluting companies. Currently, the factor applies only to marketable assets from non-financial corporations and affiliated entities, representing less than 5% of pledged collateral, though it may signal a broader shift in how European banks price climate risk ahead of its mid-2026 implementation.

• The ECB is introducing a 'climate factor' to its collateral framework that will decrease the value of assets used as guarantees if they face high climate risks. This factor is based on a three-tier analysis: asset-level vulnerability based on residual maturity, company-level exposure to transition risks, and sector-level transition and physical climate risks based on Eurosystem climate stress test data.
• The company-level analysis relies on backward-looking metrics (carbon intensity and decarbonization rates), forward-looking metrics (decarbonization targets), and disclosure quality. However, the author identifies flaws in this methodology, specifically that relying on carbon intensity allows companies to lower their score by increasing revenue while keeping absolute emissions constant, and a 'best-in-class' approach may reward companies that are merely less polluting than their peers.
• The climate factor's scope is currently limited to marketable assets issued by non-financial corporations and their affiliated entities, which account for less than 5% of the collateral pledged by banks. In contrast, bank loans and covered bank bonds represent over 30% and around 28% of collateral, respectively.
• The implementation of the climate factor, scheduled for mid-2026, could restrict financing for carbon-intensive companies by making their assets less appealing as collateral for banks, especially since such assets have historically had lower haircuts than similar assets.

APA

Martin, L. (2025). Understanding the ECB’s new climate factor. Reclaim Finance. https://reclaimfinance.org/site/en/2025/09/09/understanding-the-ebcs-new-climate-factor/

Chicago

Martin, Léo. Understanding the ECB’s new climate factor. Reclaim Finance, 2025. https://reclaimfinance.org/site/en/2025/09/09/understanding-the-ebcs-new-climate-factor/.

Wikipedia

{{cite report |last1=Martin |first1=Léo |title=Understanding the ECB’s new climate factor |publisher=Reclaim Finance |date=8 September 2025 |url=https://reclaimfinance.org/site/en/2025/09/09/understanding-the-ebcs-new-climate-factor/ |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{martin2025understanding, author = {Martin, Léo}, title = {{Understanding the ECB’s new climate factor}}, institution = {Reclaim Finance}, year = {2025}, month = sep, url = {https://reclaimfinance.org/site/en/2025/09/09/understanding-the-ebcs-new-climate-factor/}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }