FRANKFURT, Nov 7, 2025 – The European Central Bank (ECB) is incorporating climate-related risk into its assessment of collateral that banks use to borrow funds, but a recent ECB blog post shows that such risks rarely result in credit rating downgrades.

The ECB’s 2021 climate action plan prioritized integrating climate risks into its collateral framework, signaling that environmental factors should be considered when banks post assets to secure central bank loans. However, the blog notes that despite widespread recognition of climate risks, they seldom affect ratings significantly.

Key Findings from the ECB Blog

• Limited impact on in-house assessments: When the ECB uses its own credit assessment system, less than 4% of ratings are affected by climate risk, and any adjustments are generally limited to a single rating notch.
• External rating agencies: ESG factors influence about 13–19% of rating actions, but climate-specific downgrades account for only 2–7% of all actions.
• Challenges in assessment: Several factors make it difficult to fully integrate climate risks into ratings:
  • Banks may mask vulnerabilities of certain debtors.
  • Risk mitigation strategies can reduce perceived exposure.
  • Ratings are typically short- to medium-term, whereas climate risks are long-term.
  • Granular, reliable climate data is scarce, especially for smaller issuers, sovereigns, and structured finance.

The blog highlights that while climate-related vulnerabilities may be substantial, current assessment methods and data limitations constrain their effect on collateral valuations.

Implications for European Banking

The ECB’s cautious approach shows that while climate risk is officially on the radar, its direct financial impact on banks’ borrowing collateral remains limited. Analysts argue that this may delay incentives for lenders to aggressively mitigate climate exposure in their portfolios.

As ESG and climate considerations continue to gain prominence in European finance, the ECB’s integration of climate factors into its collateral framework represents a step forward, even if tangible impacts on credit ratings are modest.