ECB introduces new measures to combat climate change in monetary policy operations

Earlier this week, the European Central Bank announced new measures to reflect climate change considerations in the Eurosystem’s monetary policy framework, with some set to be introduced as early as later this year.

These measures aim to:

• reduce financial risk related to climate change on the Eurosystem’s balance sheet;
• encourage transparency; and
• support the green transition of the economy.

In line with its climate action plan and accompanying roadmap, the ECB is now seeking to account for climate change in areas including its corporate bond purchase, collateral framework, disclosure requirements and risk management.

Corporate bond holdings

The Eurosystem will seek to decarbonise its €344 billion corporate debt portfolio. For its corporate bond holdings, this means a tilt towards holdings with issuers with better climate performance (including lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate-related disclosure) through the reinvestment of the sizeable redemptions expected over the coming years, with measures expected to apply from October 2022.

By moving the share of assets on the Eurosystem’s balance sheet towards issuers with better climate performance, the ECB hopes to incentivise issuers to improve their disclosure and reduce their carbon emissions. In practice, this means that the ECB will begin to publish climate-related information on corporate bond holdings regularly from 2023.

Collateral framework

By the end of 2024, the ECB also pledges to limit the share of assets in its collateral framework of issuers with a high carbon footprint, with limits initially only applying to marketable debt instruments issued by non-financial companies. Banks will be encouraged to prepare for measures through a series of tests of the regime ahead of implementation.

Additionally, the Eurosystem will consider climate change risks when reviewing ‘haircuts’ (i.e. reductions applied to the value of collateral based on its riskiness) applied to corporate bonds from this year.

Climate-related disclosure requirements for collateral

Following the full implementation of the Corporate Sustainability Reporting Directive (CSRD), the Eurosystem will only accept marketable assets and credit claims from companies and debtors which are CSRD-compliant as collateral in Eurosystem credit operations. Due to the delay to the CSRD, this eligibility criteria are anticipated to apply as of 2026.

For those companies within the scope of the CSRD, the ECB will run tests one year prior to implementation. For those assets which do not fall within the CRSD (for example, asset-backed securities and covered bonds), the Eurosystem intends to support better and harmonised disclosures of climate-related data by engaging closely with the relevant authorities.

Risk assessment and management

Through close dialogue, the Eurosystem will urge rating agencies to be more transparent about how they incorporate climate risks into their ratings and to be more ambitious in their disclosure requirements. The improvement of external assessment of climate-related risks would further enhance the Eurosystem’s risk assessment tools and capabilities to better include climate-related risks.

Alongside this, by 2024, the Eurosystem will introduce a set of common minimum standards for how national central banks’ in-house credit assessment systems should include climate-related risks in their ratings.

Next steps

These measures will remain subject to regular review against the objectives of the Paris Agreement and EU’s climate neutrality objectives. Christine Lagarde (President of the ECB) stressed that, alongside these measures, she is “counting on the co-legislators’ ambition and willingness to further strengthen the regulatory framework underpinning climate-related disclosures and risk assessments, as well as to develop sound standards for sustainable financial product”.