The Governing Council of the European Central Bank (ECB) announced its decision to incorporate climate change considerations in the Eurosystem’s monetary policy framework. ECB decided to adjust corporate bond holdings in the monetary policy portfolios and the collateral framework of the Eurosystem, to introduce climate-related disclosure requirements, and to enhance its risk management practices.
The measures to incorporate climate change considerations are designed in full accordance with the Eurosystem’s primary objective of maintaining price stability and support the green transition of the economy, in line with the climate neutrality objectives of the European Union. Tto fulfil such objectives, the Eurosystem will:
- tilt corporate bond holdings toward issuers with better climate performance through the reinvestment of th esizable redemptions expected over the coming years. The measure aims to mitigate climate-related financial risks on the Eurosystem balance sheet and provide incentives to issuers to improve their disclosures and reduce their carbon emissions in the future. The Eurosystem aims to gradually decarbonize its corporate bond holdings, on a path aligned with the goals of the Paris Agreement. ECB expects these measures to apply from October 2022 and will start publishing climate-related information on corporate bond holdings regularly as of the first quarter of 2023.
- as part of the collateral framework, limit the share of assets issued by entities with a high carbon footprint that can be pledged as collateral by individual counterparties when borrowing from the Eurosystem. The new limits regime aims to reduce climate-related financial risks in Eurosystem credit operations. ECB expects these measures to apply before the end of 2024.
- only accept marketable assets and credit claims from companies and debtors that comply with the Corporate Sustainability Reporting Directive (CSRD) as collateral in Eurosystem credit operations. The climate-related disclosure requirements for collateral will help improve disclosures and generate better data for financial institutions, investors and civil society. ECB expects this new requirement will be applicable to all companies within the scope of the CSRD from 2026.
- further enhance its risk assessment tools and capabilities to better include climate-related risks. Additionally, the Eurosystem agreed on a set of common minimum standards for how national central banks’ in-house credit assessment systems should include climate-related risks in their ratings. These standards will enter into force by the end of 2024.
Going forward, ECB will include climate change considerations in areas of its work besides monetary policy, including banking supervision, financial stability, economic analysis, statistical data and corporate sustainability. ECB will also ensure to regularly review all the measures and assess their effects in terms of fulfilling monetary policy objectives, supporting decarbonization, improving climate data and climate risk modeling or regulation, and addressing additional environmental challenges, within its price stability mandate.
Keywords: Europe, EU, Banking, Securities, ESG, Climate Change Risk, Disclosures, Climate Neutrality, Decarbonization, Corporate Bonds, Collateral Framework, CSRD, Financial Stability, ECB
Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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