Climate-related risks and the future of collateral frameworks

The European Central Bank (ECB) recently expanded its climate factor from non-financial corporate bonds to include credit claims. This innovative measure, which adjusts the value of assets eligible as collateral in monetary policy operations, coincides with the Bank of England’s recent announcement of changes to the eligibility rules and haircuts of its own collateral. Enrique Serrano Rodriguez argues that these developments show how climate-related risk controls are becoming a core aspect of collateral frameworks.

Implications of the ECB’s extended climate factor

The ECB introduced the climate factor in June 2026. The measure serves risk management goals and is designed to protect the bank’s balance sheet from potential losses arising from the low-carbon transition. The ECB’s use of climate-related adjustments could also have signalling effects and could shape wider market incentives, even though this was not the bank’s stated intention. In this way, the climate factor prompts market participants to change their lending decisions and redirect finance towards more sustainable activities.

While the climate factor is a significant policy development, its initial scope was limited to bonds issued by non-financial corporations and affiliated entities. These assets have accounted for less than 2% of collateral pledged to the Eurosystem in recent years.However, the ECB announced on 24 July that credit claims would be incorporated into the climate factor framework by the end of 2027. This is a notable expansion, since credit claims have been the most mobilised asset class in recent years, accounting for as much as 30% of the total collateral pledged by counterparties in ECB refinancing operations (see Figure 1).

Figure 1. Share of use of collateral per asset class, second quarter of 2026

Source: ECB (2026). Note: Average end-of-month data.

Credit claims constitute loans to non-financial corporations, public sector entities and international and supranational institutions. Their importance within the Eurosystem is widely recognised, because small and medium-sized enterprises in Europe traditionally obtain funding through banks rather than capital markets. Allowing financial institutions to pledge these loans, which often make up the largest share of their balance sheet, guarantees access to liquidity and provides funding to the real economy and monetary transmission. The expansion of eligible credit claims through additional credit claims (ACCs) frameworks, first introduced in 2011, also helps provide stability during periods of financial stress.

The ECB’s methodology for credit claims is expected to include an uncertainty score broadly similar to the one it initially developed for corporate bonds. The asset- and sector-specific components of the methodology are based on residual maturity and climate stress-testing results, respectively. A debtor-specific component will assess loan recipients’ exposure to uncertainties related to the low-carbon transition. Where debtor-level climate data is unavailable or insufficient, sector-level figures are expected to fill the gaps.

Although there is a relative lack of climate data on small and medium-sized enterprises, several measures could help address this. The Banque de France has created the indicateur climat (which provides a methodology for assessing firms’ transition plans and preparedness) and reportedly intends to apply it to many companies and sectors in the coming years. Other national central banks could follow suit by developing their own channels for engaging with smaller companies within their jurisdictions.

Supervisory insights into climate and environmental risks could also support more granular assessments of debtors of significant EU banks that are under direct ECB supervision. While data exchanges between the ECB’s monetary and supervisory functions are strictly regulated and may occur only on a need-to-know basis, such data-sharing and repurposing practices may become increasingly necessary in an environment characterised by the simplification of reporting and a reduced appetite for mandatory disclosures.

Crucially, the ECB’s recent announcement also discloses a key parameter in the climate factor formula: the maximum adjustment to collateral value. This lower bound is set at 5%, meaning the climate factor can reduce the collateral value to 0.95. The following example shows how this would apply to credit claims.

A counterparty pledges a fixed interest-rate loan with an outstanding amount of €25,000 and a residual maturity of five years. The loan is subject to a standard haircut of 27%, and the debtor and sector of this credit claim are highly exposed to transition-related uncertainties. Combined with the residual maturity, the climate factor of the credit claim is 0.95, the largest adjustment possible. Accordingly, the final collateral value of the credit claim is:

[€25,000 * (1 – 0.27)] * 0.95 = €17,337.5

Therefore, the bank would receive €17,337.5 rather than the original value of €25,000, as shown in Figure 2.

Figure 2. Illustrative example of the climate factor for a credit claim

Source: Author’s analysis.

The Bank of England and corporate collateral

The Bank of England has also strengthened its collateral framework, which already contained significant climate-related measures. In 2024, the bank decided to exclude mortgages, its most significant collateral class, that were not compliant with the minimum energy efficiency standards, and to adjust their haircuts based on their energy efficiency label and exposure to flood and subsidence risk. A Market Notice published in June 2026 announced the following measures, which are expected to be implemented on 31 October:

• Bonds issued by corporates that derive their revenue from thermal coal mining will not be eligible as collateral.
• Corporate bonds from sectors exposed to transition-related financial risks will receive haircut add-ons.

The haircut add-ons are particularly similar in function to the ECB’s climate factor. They are adjustments to collateral value that are made after the standard haircuts. Although the Bank of England has not yet provided further details on how the haircut add-ons will be calculated, the reference to sectoral exposure suggests that these measures will account for the issuer’s economic activity. Like its EU counterpart, the Bank of England may draw on its regular climate stress tests for this purpose. In its December 2025 Financial Stability Report, for instance, the Bank of England included an assessment of climate-related risks in which sectors such as mining and transport experienced the largest fall in asset prices caused by carbon price shocks and other transition uncertainties.

According to the Bank of England’s latest climate-related disclosures, corporate bonds account for less than 1% of total collateral. Therefore, the haircut add-ons are unlikely to produce noticeable effects in the short term. However, because corporate bonds remain eligible within the Bank’s collateral framework, the measure provides pre-emptive protection in case counterparties change their collateral preferences in the future. As can be seen in Figure 3, nearly two-thirds of the Bank of England’s collateral holdings are now subject to climate-related collateral rules. As in the Eurosystem collateral framework, the next asset classes subjected to assessments of climate-related risks could be sovereign bonds, asset-backed securities and covered bonds.

Figure 3. The Bank of England’s collateral holdings by asset class

Source: Author’s analysis based on the Bank of England’s data sets.

Future changes to collateral frameworks

The recent announcements from the ECB and the Bank of England mark important steps in embedding climate-related considerations in monetary policy operations. Collateral rules constitute a key part of a central bank’s work, because they determine access to central bank liquidity and influence the assets that financial institutions can mobilise in credit operations. These recent developments could, therefore, encourage other monetary authorities to assess the carbon bias of their own collateral frameworks and consider similar risk management measures.

Further work could focus on extending climate factors to additional asset classes or different environmental risks. In the Eurosystem, asset-backed securities and covered bank bonds are among the most important collateral categories after credit claims. Applying an uncertainty score to these instruments would require assessing how the underlying assets, such as mortgages and vehicles (in the case of auto asset-backed securities), are exposed to climate-related transition and physical shocks that could affect their value. Both the ECB and the Bank of England could also expand their analysis beyond climate change to consider nature-related financial risks. At CETEx, we continue to explore how nature and biodiversity considerations could be incorporated into collateral frameworks in a manner similar to that of the climate factor.

The author would like to thank David Barmes, Rob Patalano and Harriet Richards for their review of this work.