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The ECB has expanded the Climate Factor from bonds to loans, which account for almost 30% of collateral in the euro system, and are at risk of a deduction of up to 5%. European banks are urging transparency in the calculation formula.
On September 9, 2026, at 3:00 PM, Bloomberg News reported that the European Central Bank (ECB) is facing pressure from the banking sector to disclose details of its climate risk calculation formula after the ECB proceeded to expand the use of climate factors to assess the value of collateral that banks use in exchange for access to central bank liquidity.
Denisa Avermaete, head of sustainability finance at the European Banking Federation (EBF) , representing banking associations across the region, stated that it is important for the ECB to expand the scope of risks considered, but the process should be transparent as there is currently uncertainty regarding these calculations.
The ECB is expanding the use of the Climate Factor to determine the value of assets that banks can pledge as collateral for access to central bank liquidity. In a policy update in July, the ECB indicated that the factor would apply not only to corporate bonds but also to credit claims, which account for almost 30% of all collateral pledged in the euro system.
These measures are scheduled to take effect at the end of next year and could result in a "haircut" of up to 5% on banks' collateral values to reflect climate-related risks in particular.
Currently, the ECB states that the Climate Factor calculation only covers transition risk, such as companies with high carbon emissions facing reduced profitability due to stricter environmental regulations or changing consumer behavior, which could impact their ability to repay debt.
However, an ECB spokesperson told Bloomberg that the central bank will continuously review the scope of the Climate Factor, meaning that in the future, the bank may have to consider the physical climate risk of borrowers as well, such as the risk that companies will be affected by extreme weather events caused by climate change.
Regarding the transparency demands, the ECB clarified that the primary purpose of the Climate Factor is to protect the ECB's balance sheet, not to guide monetary policy decisions, which results in different disclosure requirements.
Frederic Duculombier, head of the climate policy program at the EDHEC Climate Institute, said that as the ECB expands the scope of the use of the climate factor, companies and banks should have the right to know the formula used to calculate the collateral deduction.
He believes that transparency will allow markets to examine and test the relationship between the climate risk scores assigned by the ECB to companies and the financial sensitivity of companies and their bonds to climate risk.
Although the ECB has released its overall climate factor framework, the central bank has stated that it will not publicly disclose data for individual loan claims. This means that companies and banks may not be able to independently model the ECB's calculation process to assess the level of haircut.
BBVA, Spain's second-largest bank, has developed a tool that it claims can be used to compare with the ECB's approach, but acknowledges that because the ECB does not disclose the scores it calculates for bond issuers, significant differences in weighting and variable adjustments could occur.
ING Group, the Netherlands' largest bank, stated that while the ECB has not disclosed its calculation methodology, conceptually the approach aligns with how ING assesses transition risks.
Duculombier added that the ECB might feel uncomfortable if the formula were subjected to public scrutiny, as the methodology might not be robust enough. However, openness to scrutiny is one way central banks can improve tools that are still in the experimental stage.
He doesn't expect the ECB to release significantly more data without continued pressure from questions about its methodology, the media, and affected market players.
Avermaete from EBF believes that although the calculation formula is still unclear, the key takeaway from this change is that climate risk is becoming an increasingly integral part of central bank mechanisms, including collateral, valuation, and liquidity management.
Expanding the climate factor from corporate bonds to loans is a significant step, as loans account for approximately 17 times more of the collateral that meets the Eurosystem criteria than corporate bonds, which previously fell under those criteria.
Currently, banks' demand for liquidity from the ECB remains low, with refinancing loans in the Eurosystem standing at approximately €26,000 billion, or $30,000 billion, compared to assets of approximately €1.59 trillion that banks have set aside as collateral.
However, amidst pressure on bond markets from budget deficits, inflation, and prolonged geopolitical tensions, the demand for central bank liquidity could quickly rebound.
Several banks have already begun implementing measures to protect their balance sheets from climate risks. BBVA stated in June that it had started adjusting interest rates charged to loan customers based on the level of risk from the physical impacts of global warming, and had also adopted a Transition Risk indicator similar to that used by the ECB.
UniCredit stated that incorporating climate factors into lending reflects the ECB's need to create a holistic risk management framework that encompasses all sources of uncertainty associated with the transition to a green economy.
Pascal Gomfan, a senior European Union legislator, stated that the consequence is that the cost for banks to lend to polluting activities is increasing, and banks will question clients more about the risks associated with climate transition.
Reference: bloomberg.com
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