By Toby McIntosh
Two key transparency gaps are impairing the potential effectiveness of a “climate factor” recently instituted by the European Central Bank, according to environmentalists and academic researchers.
First, the methodology used to value corporate assets is not fully transparent, limiting the evaluation of what some see as a flawed system.
Second, the resulting scores are kept confidential, limiting the opportunity for financial markets to benefit from the ECB’s assessments.
The objections about the lack of transparency blend into larger debates about the ECB climate change policies, which some see as lacking in ambition.
Climate Factor Used to Value Assets
The climate factor is used by the ECB to value of some corporate assets offered as collateral for ECB loans.
Its introduction a year ago was applauded as a small step toward influencing corporate behavior and combating climate change. But the ECB downplays such motivation, saying the climate factor is only intended to protect the central bank’s balance sheet from adverse climate-related transition shocks.
The climate factor that the ECB began using in June is intended to measure how climate change might affect corporate bond assets that banks pledge as collateral in exchange for loans from the ECB.
The value of collateral assets with higher climate risks is discounted by the ECB based on the climate factor. “The higher the sensitivity of the collateral to climate uncertainties, the greater the reduction applied to its collateral value,” the ECB summarized.
The scope of the policy now is modest, covering less than 2 percent of pledged collateral, because it applies only to “individual marketable assets issued by non-financial corporations and their affiliated entities.” And the potential discount for climate-impacted collateral is capped at five percent, according to an ECB announcement of July 24.
However, the ECB in July signaled a future expansion of the policy to include non-financial corporate credit claims, loans that companies owe to banks, the largest share of collateral used, about 29 percent.
Asset-backed loans from the ECB provide liquidity to banks. And the loans are a way for the ECB to manage short-term interest rates and inflation and to protect itself against financial loss. “Haircuts” are already applied to pledged assets based on other factors, such as credit risk and market volatility. And now the “climate factor.”
The ECB policy “addressing financial uncertainties related to the green transition” was approved in July 2025 and became effective on June 15, 2026. The ECB on Jan. 22 published a detailed methodology. There’s an FAQ description and an explanatory July 24 blog post.
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Potential for Signaling Missed
The climate factor scores are not transparent, which some observers see as a lost opportunity.
“The climate factors for individual credit claims will not be publicly disclosed,” the ECB stated on July 24. Elaborating on Sept. 2, an ECB spokesperson told Eye on Global Transparency (EYE), “We do not disclose individual climate factors or their components, as this is not necessary to achieve the objective of protecting the Eurosystem’s balance sheet.” She noted the five percent maximum reduction.
Are the reductions disclosed to the affected companies? “No, that is also not necessary for the purpose of climate factors,” the ECB spokesperson said. “That purpose is to protect the Eurosystem’s balance sheet against potential declines in the value of collateral resulting from adverse climate-related transition shocks.”
However, public disclosure of the climate factor scores is seen by some as a good way to help financial markets weigh climate change risks in their corporate valuations.
Disclosure “has the potential to generate market signals that favour assets with lower exposure to climate risks,” according to researchers at the London School of Economics. “The extent to which this positive side-effect may significantly depend on the transparency of the measure,” they wrote. Their critical assessment of the ECB program was published in August, authored by Enrique Serrano Rodriguez, David Barmes and Alejandra Niño Corredor.
Explained the signaling effect, they wrote:
If the ECB published climate factor values alongside standard haircuts in its list of eligible assets, this would allow banks and investors to identify which assets faced higher or lower collateral valuations and to adjust their portfolio choices accordingly. By contrast, limited disclosure could weaken the market‑based transmission channel.
The researchers attempted to estimate the magnitude of the ECB climate factoring, but found the lack of “issuer-specific” data to be “a significant challenge.”
Rodriguez told EYE, “There are many academics who think that it is within central bank mandates to follow a more impact-based approach, because climate change ultimately causes inflation and financial instability. Hopefully one day the ECB might be convinced to share the climate factor values.”
Ducoulombier Supports Scoring Transparency
Frédéric Ducoulombier, who heads the Climate Regulation and Policies programme at EDHEC Climate Institute, a French business university, sees the ECB’s climate factor system as limited in multiple ways, described in an article published Aug. 26 in The Banker.
“On issuer scores, my view is that the ECB should publish them or, at a minimum, publish the climate factor and its principal components for each marketable asset,” according to Ducoulombier.
“Disclosure would allow issuers and researchers to identify errors, assess consistency and understand why comparable assets receive different treatment,” he said.
Further:
It would also allow banks, investors and other institutions to use the scores. This is especially important if the factor is expected to create a wider sustainability pricing signal. An opaque score is unlikely to transmit far beyond the Eurosystem’s own operations.
The ECB’s position that disclosing individual scores or climate factors is “not necessary” for protecting the Eurosystem’s balance sheet “explains its policy choice, but does not establish that withholding them is legally required or that the degree of transparency is adequate,” commented Ducoulombier.
Reclaim Finance Calls for More Transparency
“The main transparency problem is that the ECB doesn’t publish the climate factor for each asset,” according to Clarisse Murphy, the Central Banks Campaigner for Reclaim Finance, a nongovernmental organization based in Paris. She wrote an analysis of the program and a column for Green Central Banking. “And by the looks of it, the ECB has no intention of changing this,” she noted.
“Although it has been making some efforts over the years, the ECB still has some significant problems with transparency,” Murphy told EYE.
“When it comes to the climate factor,” she said, “the ECB published some information, but overall not enough to allow external stakeholders to accurately estimate the climate factors of assets pledges as collateral.”
Murphy elaborated. “This would be fine if we could easily calculate the climate factor of assets. But the ECB also doesn’t give enough information about the different components of the factor to allow external stakeholders to accurately calculate them.”
In addition, determining whether the program is working, she said, is complicated because “we don’t actually know which assets in the pool of eligible ones were pledged by banks in the end.” Murphy continued, “This means we can’t check if the climate factor had any impact on which assets are used as collateral.”
It is possible to see which assets were subject to the climate factor, the ECB spokesperson said, “You can download the full list of eligible marketable assets and see which ones are subject to the climate factor here.”
But the list contains detailed information on all “eligible” assets, not for “pledged” assets. This eligible assets list includes other “haircuts” applied to each security and is updated every working day. The climate factor haircut is not disclosed. Instead, the ECB publishes only a binary “Yes” or “No” indicator showing whether the climate factor applies, without revealing its value.
More broadly, Murphy said, “I quite disagree with the idea that the climate factor should only focus on protecting the balance sheet – this is a very narrow, single materiality approach (i.e. the impact of climate change on the ECB).”
She told EYE:
Given the importance of climate change when it comes to price and financial stability, the ECB should also pay attention to how its policies contribute to the problem (double materiality). Eligibility in the collateral framework benefits companies, so allowing companies with destructive practices to be used as collateral is akin to a form of support for these companies.
Three Elements Used in Scoring Formula
The ECB calculates the risks posed by climate change for each asset by using a three-part formula to create an “uncertainty score.” This is intended as “a forward-looking scenario analysis,” as the ECB puts it.
The one public element in the scoring system concerns of how 22 different industry sectors might be impacted by climate change.
The ECB on July 7 published a chart showing the uncertainty scores by sector. This “stressor” component shows potentially greater financial impacts on the carbon intensive utility sectors than on the software and services sectors.
“The sector measure comes from the Eurosystem’s climate stress test, using Fit-for-55 scenarios built around a “run-on-brown” shock in which investors abruptly sell carbon-intensive assets,” explained Ducoulombier.
Ducoulombier sees the ECB’s system as limited in a variety of ways. He asked, “Why does it anchor transition risk in a particular adverse “run-on-brown” scenario when good risk management calls for resilience across plausible scenarios?”
Corporate Score Not Revealed
The second component is a climate score for individual companies.
“Exposure,” as the ECB calls this factor, “is assessed at firm level, using information on greenhouse gas emissions, decarbonisation targets and the quality of climate-related disclosures.”
Based on public information and information from the companies, the ECB assessment includes data such as past greenhouse gas emissions per unit of revenue, as well as the rate of decarbonization. The assessment also includes “forward-looking metrics” such as expected changes in the issuer’s future greenhouse gas emissions. The completeness of climate disclosures is also included. Three “sub-scores” are combined.
The corporate scoring system was originally developed for non-financial corporations whose bonds the ECB purchased under a 2016 Corporate Sector Purchase Programme (CSPP) that lasted only 14 months. The metric is the same for all assets issued by the same entity. More than 500 companies were evaluated and graded on a 0-5 scale. The CSPP scores were not published.
The third factor, known as “vulnerability” in ECB terminology, is based on the maturity dates of the assets.
It treats longer‑term securities “as more vulnerable to shocks because a larger share of their cash flows is exposed to future transition developments.” The ECB methodology paper calls it “an assessment of how sensitive an asset’s market price is to unexpected future climate shocks, taking into account its residual maturity.”
The three elements are combined using a formula described in Annex XIIb of the methodology.
Other Voices for Transparency and Improved Methodology
“… Greater transparency around the methodology would be very welcome,” wrote Ducoulombier of the EDHEC Climate Institute in a recent LinkedIn comment.
Similarly, Robin Willing, Sustainability Director at NIBC Bank, wrote during the same LinkedIn exchange that the ECB should “disclose the methodology by which they come to the haircut (this would add transparency in terms of how they measure the financial risk).”
Ducoulombier, Willing and others maintain that the ECB climate factor isn’t designed to accurately predict sensitivity to climate shocks. The details of the discussion involve what kinds of shocks to be accounted for, the degree to which other haircut policies capture climate risk, and more.
An even wider debate is over whether the ECB should go beyond its currently state goal of prudential management and try to influence credit allocation among industry sectors based on climate change considerations and to account more for climate change’s effects on inflation and financial instability.
Regarding the climate factor now in use, observers agreed that more transparency is needed.
Ducoulombier told EYE that both the model and scores can be disclosed. “Transparency does not require disclosing confidential raw data, but it does require publishing the conceptual framework, assumptions, scenarios, equations, calibration choices and sensitivity tests.”
More specifically in terms the methodology, Ducoulombier noted that the ECB says that the sectoral component of the climate factor is derived from the expected shortfall under “the adverse scenario” of its climate stress test. “But,” he said, “it has not specified which of these two scenarios it uses. Nor, to my knowledge, has it published the sectoral stress values entering the calculation.
“The first adverse scenario applies this “run-on-brown” shock, which affects corporate profitability and asset values differently across sectors,” Ducoulombier said. “The second adds broader macroeconomic and financial stresses to the same transition shock,” he said.
“The distinction matters,” Ducoulombier elaborated. He said: “In several sectors, the shock under the second scenario is more than twice as large as under the first. If the ECB uses the second scenario, some of the resulting adjustment may reflect an ordinary macro-financial downturn rather than climate transition risk specifically. Such risks may already be reflected in market prices, ratings and standard haircuts.”
And the transparency gap doesn’t end there, Ducoulombier told EYE:
“There are several elements on which greater transparency would be useful:
- the precise scenario, sectoral shocks and sector classifications used;
- the methodology and data underlying the corporate climate score, including the treatment of missing information;
- the individual corporate scores and the mapping of issuers into score categories;
- the parameters used to transform the resulting “uncertainty score” into a collateral adjustment, including how the maximum 5% reduction was calibrated;
- sensitivity analyses showing how different scenarios, assumptions and functional forms affect the result;
- an explanation of what risk is believed not to be captured already by market prices, credit assessments and standard haircuts, and how double counting is avoided;
- validation showing how the measure relates to the additional loss that the Eurosystem could experience between a counterparty’s default and the liquidation of its collateral; and
- for the extension to credit claims, the data and proxies that will be used where debtor-level climate information is unavailable.”
Willing Also Seeks Refinements, Agrees on Transparency
Willing, also addressing possible refinements in methodology, said on LinkedIn that the ECB should “include physical risks in the haircut” and “publicly disclose measurements on emissions along the same lines as commercial banks (Scope 123), GAR & Taxonomy alignment (including the templates), climate transition plan, value chain human rights risks.”
Willing added: “My concern is precisely that the current climate factor is presented as a balance-sheet protection tool while its methodology looks at least partly allocative. If the objective is allocation, it should be stated and assessed as such, including whether the mechanism actually supports credible transition within high-emitting sectors rather than simply favouring activities that are already lower-carbon.”
The LinkedIn exchange revealed differences on methodology, but as Willing summed it up, “I think we agree on two important points: physical risk deserves much more attention, and greater transparency around the methodology would be very welcome.”
