European Central Bank imposes haircuts on climate-risk collateral

The European Central Bank just put a price tag on climate risk. On July 29, the ECB announced a new “climate factor” within its collateral framework that will apply additional haircuts to certain corporate bonds used as collateral in Eurosystem operations. Think of it as the central bank telling lenders: if you want to borrow against bonds from companies exposed to climate transition risk, those bonds are now worth a bit less at the window.

The policy targets marketable bonds issued by non-financial corporations and their affiliates, with implementation set for the second half of 2026.

How the climate factor actually works

Collateral haircuts are already a standard feature of central banking. When a bank pledges an asset to borrow from the ECB, the central bank doesn’t accept that asset at face value. It applies a discount, a haircut, to account for the risk that the asset could lose value before the loan is repaid. A 10% haircut on a bond worth 100 million euros means the bank can only borrow against 90 million euros of value.

The new climate factor adds an extra layer to that existing discount. Its calibration is based on an “uncertainty score” that pulls from two main inputs: sector-specific stress factors identified in the Eurosystem’s 2024 climate stress test, and issuer-specific vulnerability scores from the Corporate Sector Purchase Programme’s climate scoring methodology.

The ECB has also committed to regular reviews of the climate factor’s calibration. As climate data improves and transition pathways become clearer, the haircuts could tighten or loosen accordingly.

Context: a slow build, not a sudden pivot

The ECB has been laying groundwork for climate integration into monetary policy since at least its 2021 strategy review, which formally acknowledged climate change as relevant to the bank’s mandate. Since then, the central bank has conducted climate stress tests of its balance sheet and introduced “climate tilting” in its corporate bond purchases. The 2025 climate and nature plan, an updated version of the ECB’s sustainability roadmap, provided the framework for this latest step.

The Bank of England is expected to implement similar climate-related collateral adjustments by June 2026. Some climate campaigners have pushed for a more aggressive approach, including outright exclusion of bonds from high-emitting sectors. The ECB opted for a softer path, using graduated haircuts rather than exclusions.

The ECB itself anticipates minimal immediate impact on counterparties. Current borrowing levels are relatively low, and corporate bonds make up a limited share of the collateral pool used in Eurosystem operations.

Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.