7 November 2025
Climate risks affect credit ratings. And these, in turn, influence how banks can use securities as collateral to borrow money. This post takes a closer look at how the Eurosystem integrates climate change risks into its own collateral framework, through the credit risk channel.
Central banks must prepare for the financial risks that come with rising temperatures and fast-evolving green policies. In the Eurosystem, we are actively working to ensure that the euro area’s monetary policy framework keeps pace with the realities of climate change.
One area where these efforts have borne fruit is the incorporation of climate change risks (CCR) into credit ratings. These ratings are central to the Eurosystem’s collateral framework. These rules determine the quantity and type of assets banks can use as collateral when borrowing from the Eurosystem. Banks can only borrow central bank money if they provide assets of adequate credit quality, measured using ratings. If a bank fails to pay back, the Eurosystem can sell these assets to avoid potential losses.
However, if credit ratings fail to properly reflect climate risks, the Eurosystem may end up accepting overvalued, high-risk assets or applying insufficient safeguards. With this in mind, the Eurosystem works both with the external credit assessment institutions (ECAIs) accepted under its credit assessment framework – DBRS Morningstar, Fitch Ratings, Moody’s, Scope Ratings and S&P Global Ratings[1] – and its own in-house credit assessment systems (ICASs). This ensures that both external and internal ratings duly account for all sources of credit risk – including those stemming from the economic consequences of climate change. To this end, the Eurosystem regularly consults with credit rating agencies on how best to take climate change into account. It has also established standards for its ICASs.
Why climate-conscious credit ratings matter at the ECB
Whenever a bank borrows from the Eurosystem, it has to pledge collateral (i.e. the assets that secure the loan). Under the Treaty on the Functioning of the European Union, the Eurosystem can only accept “adequate collateral”. What this means depends largely on an asset’s credit rating. The better the rating, the more a bank can borrow relative to the face value of the asset. For example, an AAA-rated asset carries a lower “haircut” – that is the reduction of its market value acting as a risk cushion for Eurosystem – than one rated BBB. In other words, ratings really do matter.
A lack of sufficient experience and empirical evidence makes it more challenging to incorporate CCR into ratings compared with traditional risks such as financial health, business cycles, competition and innovation. This makes it harder to estimate the extent to which a borrower’s creditworthiness is affected by climate change.
Nonetheless, the ECB’s 2021 climate action plan made the integration of climate risks into all relevant elements of its collateral framework a priority, with a particular focus on credit ratings. The action plan set out a roadmap for making the euro area’s monetary policy framework more resilient to climate risks. This includes improving climate data, incorporating environmental risks into asset valuations and adjusting how the Eurosystem accepts and values collateral. In practical terms, the Eurosystem now requires that climate change be factored into all of the credit ratings used within its collateral framework.
Figure 1
How climate risks are integrated in the collateral framework via the credit risk channel
ICASs: Eurosystem central banks leading by example
All seven Eurosystem ICASs now account for climate change risk in their credit ratings. Managed by the national central banks, these systems mainly rate large and medium-sized businesses. They assess CCR using both quantitative tools and expert judgment. Meanwhile, ICAS analysts evaluate physical risks, such as those from floods and wildfires, and transition risks, such as those linked to carbon pricing and regulation.
Their analysis typically encompasses two stages:
- assessing exposure to climate change risk, using data on emissions, energy use and geographical vulnerability;
- evaluating the impact of these risks on creditworthiness, considering mitigating factors such as insurance, adaptation plans and carbon offsets.
The ICASs use internal carbon stress tests to simulate how transition risks affect company finances. Different jurisdictions apply different pricing scenarios, including the carbon price pathways of the Network for Greening the Financial System (NGFS) and statistical models. These inputs feed directly into the adjusted financial projections of credit issuers – i.e. borrowers’ expected financial performance – and can lead to changes in ratings.
In the case of physical risks, the ICASs use a range of tools to translate environmental hazards (floods, landslides, storms, etc.) into expected financial losses. To ensure consistency and comparability, several ICASs use climate indicators taken from a harmonised dataset developed across the Eurosystem. These indicators help the Eurosystem to better analyse the climate change risks that could affect monetary policy, price stability and the financial system. Crucially, in-house analysts assess not just risks. They also account for the climate opportunities that can enhance creditors’ financial performance, such as the benefits of the energy transition.
How do CCR affect in-house credit scores?
On average, 69% of the credit ratings of the seven ICASs currently include CCR assessments, accounting for 56% of the ICAS-rated collateral mobilised by banks. Some countries are approaching full coverage. This is in line with the ECB’s minimum standards for incorporating climate change risk into ICASs, which have been applicable since the end of 2024.
Across the Eurosystem, the share of ICAS ratings affected by climate risks is currently below 4%, and the adjustments made are typically limited to one rating grade. So climate risks do not have a major overall impact on ratings at present. Transition risks have a more pronounced effect on credit ratings and assessments than physical risks. Here, manufacturing, construction and trade are the most affected sectors. Some ICASs have upgraded ratings thanks to green investments or climate-aligned business strategies. In contrast, physical risks, particularly in the form of acute climate events such as floods, have led to rating downgrades, reflecting the economic damage and cost such events entail. These findings are broadly in line with our observations below on external agencies.
Figure 2
How climate risks are incorporated in ICAS ratings
ECAIs: progress made by external agencies on climate risk integration
As already noted, ICASs are only one side of the coin. The Eurosystem also accepts the credit ratings issued by five External Credit Assessment Institutions (ECAIs): DBRS Morningstar, Fitch Ratings, Moody’s, Scope Ratings and S&P Global Ratings. These agencies have also taken significant steps to integrate CCR into their rating frameworks, reflecting the growing recognition that climate risk also entails financial risk.
Rating agencies now include CCR as part of their analysis of environmental, social and governance (ESG) risks. They generally distinguish between physical risks and transition risks, and apply tailored methodologies and tools to different asset classes and sectors. Moreover, they are now expanding their scenario analyses, developing adaptation metrics and strengthening links between climate data and credit assessments:
- Moody’s uses Issuer Profile Scores and Credit Impact Scores to indicate the relevance of ESG risks. So far, the agency has rated the climate vulnerability of over 12,000 issuers, covering sovereigns, corporates and structured finance.
- Fitch Ratings applies ESG Relevance Scores and has developed Climate.VS – a tool that overlays physical and transition risk data with sector-specific climate vulnerability scores.
- S&P Global Ratings integrates ESG indicators into its sectoral methodologies and conducts forward-looking climate scenario analyses to assess financial resilience under different climate pathways.
- Scope Ratings includes an ESG pillar in its sovereign ratings methodology and is rolling out cross-asset climate stress testing, particularly for financial institutions and corporates.
- DBRS Morningstar incorporates ESG risks via structured checklists and leverages its partnership with Sustainalytics[2] to enhance sector-level analysis, especially for the automotive, energy and insurance sectors.
How do CCR affect external credit ratings?
The impact of climate risks on final credit ratings remains limited. ESG factors influence approximately 13% to 19% of all rating actions across the major agencies, but CCR-specific downgrades account for only 2% to 7%. That said, climate risks now play a greater role in the credit ratings of sovereigns, utilities and the automotive and insurance sectors. These are sectors with high emissions exposures and transition dynamics or direct sensitivity to extreme weather events.
The challenges ahead: from risk recognition to risk integration
Despite the notable progress made by both ICASs and ECAIs, several persistent challenges still limit the full and consistent integration of CCR into credit ratings.
While climate risks are widely recognised, 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.
Furthermore, 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.
Another challenge increasingly recognised as a financial risk is nature degradation and biodiversity loss. The major credit rating agencies seek to capture this through the environmental pillar of their ESG frameworks. Here, impacts such as deforestation, habitat loss and resource depletion can influence sector and issuer assessments, particularly in agriculture, forestry, fisheries and the extractive industries. Within the Eurosystem, the ICASs also consider these risks when they are deemed credit relevant.
By incorporating these aspects, the ECAIs and ICASs are expanding their coverage of credit-relevant sustainability risks further, thereby helping to ensure that credit ratings reflect a broader range of environmental challenges. However, modelling and data limitations remain more acute in this area.
Keeping climate disclosures on track
The regulatory landscape is constantly evolving, with both progress and potential setbacks. The ECB has pushed for further integration of CCR in banks’ internal models and has welcomed the EBA’s guidelines on ESG risk management. Climate stress testing and supervisory engagement help banks, ECAIs and ICASs to refine their methodologies and expand their climate coverage.
To ensure the continued availability of high-quality climate-related data, the ECB has underlined the importance of maintaining strong disclosure obligations under the Corporate Sustainability Reporting Directive (CSRD). The CSRD is the EU’s main sustainability framework and requires that companies publish detailed information on their environmental and climate impacts, as well as on their own exposure to climate and nature risks. This information is essential if credit rating agencies, banks and the Eurosystem are to properly integrate climate-related risks into their credit assessments and collateral management. In the context of the draft “Omnibus” package proposed by the European Commission, the ECB has stressed that these amendments must strike the right balance between retaining the benefits of sustainability reporting for the European economy and the financial system and ensuring that the requirements remain proportionate.
What comes next?
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.
We will continue working closely with ICASs, credit rating agencies, financial institutions and EU lawmakers to refine methodologies, close data gaps and promote credible, science-based financial assessments. By acting now, we can help safeguard financial stability and curb the buildup of unpriced climate risk.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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The Eurosystem currently accepts five credit rating agencies in its credit assessment framework (ECAF). See this blog post.
Sustainalytics is a firm that rates how companies manage ESG risks and opportunities.