The European Central Bank (ECB) plans to expand its climate factor framework for collateral to eligible loans to non-financial corporations. Previously applied only to corporate bonds, the scheme adjusts the valuation of banks’ pledged assets according to climate transition risks. Stemming from last year’s Eurosystem balance sheet climate stress tests, the revised mechanism generates an asset-level uncertainty score based on sectoral climate stressors, debtors’ transition risk exposure and residual loan maturity. Collateral more sensitive to climate uncertainties will face larger valuation haircuts, capped at an additional 5%. The extension, aimed at bolstering the Eurosystem’s risk management amid the green transition, is set to take effect no earlier than end-2027 with annual updates to climate factor parameters.
Source: https://www.esgtoday.com/ecb-expands-application-of-climate-risk-factors-in-collateral-framework-to-corporate-loans/