Companies overlooking climate are not truly managing risk.
Addressing this challenge is core to our work, and we’re glad to see the European Central Bank (ECB) stepping up.
What’s happening?
Could you imagine if all companies treated climate targets with the same seriousness as financial ones?
The ECB recently examined at how climate risks affect its own investments and found that corporate bonds remained the most exposed. In fact, the financial damage caused by climate-related events has more than doubled over the last 20 years.
To address this, the ECB is introducing a “climate factor” into its collateral framework. This means that bonds from companies more exposed to climate risks will be valued lower, making them more costly to hold or to use. This is calculated using an uncertainty score based on sector stress, issuer exposure, and asset vulnerability (BCG, Banking Vision).
Why does this matter?
- A groundbreaking precedent
The ECB is the first central bank to price climate risk into core monetary tools at this scale. It is monumental, but let’s not forget that for now it only applies to EU-issued, marketable assets, which aren’t necessarily those facing the most acute climate stress vs the global south, for example. - A likely domino effect for banks
By lowering the value assigned to high-risk corporate bonds, the ECB is nudging banks to reassess their collateral pools. As the approach matures, banks may follow suit, adopting climate-risk premiums and re-orienting funding towards greener outcomes. - Implications for private markets
This approach can be translated across the investment chain. In private debt, infrastructure or PE cycles, investors could incorporate equivalent “climate factor” adjustments when pricing risk, reinforcing the importance of climate stress testing in every transaction.
What these changes mean for your organisation
The ECB’s new climate factor signals a shift in how a powerful bank in Europe evaluates assets. The rest of the financial system is likely to follow.
For companies, climate risk moves from a talking point to a balance sheet issue. Investors, lenders and insurers increasingly treat weak climate performance as a liability. This can lead to higher costs of capital, restricted access to funding and lower asset valuations for businesses that fall behind.
The takeaway is clear. Integrating climate risk management and accelerating decarbonisation has become essential for staying competitive in capital markets.
Have questions about climate risk and how to navigate the complexities of a financial strategy? Reach out to our Sustainable Finance and Investment Lead, Ottilly Mould.
Read more
- The European Central Bank’s full press release
- The cost of inaction from BCG
- On the ECB climate factor from Banking Vision
The strategic case of climate risk assessments
Climate change is reshaping industries, supply chains, and financial markets, making climate risk assessments a strategic necessity for businesses.
Author details
Ottilly Mould
Senior Manager
