Climate risks affect credit ratings. And these, in turn, influence how banks can use securities as collateral to borrow money. A recent post from the European Central Bank (ECB) takes a closer look at how the Eurosystem integrates climate change risks into its own collateral framework, through the credit risk channel.
While climate risks are widely recognized, they rarely lead to rating changes. There are several reasons for this:
- strong financials or diversification strategies can mask the vulnerabilities of some debtors;
- risk mitigation strategies (e.g. insurance or carbon offsets) can reduce their perceived exposure;
- rating horizons remain short and medium term, whereas climate risks tend to be long term; and
- reliable, granular climate change-related data remain scarce, particularly for smaller issuers, sovereigns and structured finance. Public disclosures vary, and asset-level exposure data (e.g. on property flood risk) are often unavailable.
“The Eurosystem’s work on embedding climate risk into credit ratings is not just about making technical adjustments; it also strengthens monetary policy implementation and ensures that the collateral framework is fit for a climate-affected future,” ECB researchers wrote.