Will the European Central Bank make debt more expensive for big emitters?

Influential supervisor is building the case for climate risk to be calculated (and valued) at firm and sector level

Debate about the future of the EU Corporate Sustainability Reporting Directive (CSRD) may have gone quiet in Brussels during the summer break, but it didn’t stop the European Central Bank (ECB) from wading in.

The bank’s president, Christine Lagarde, wrote to MEPs in August, warning them not to streamline the rules too much.

She argued that the current proposal to remove 80% of companies from the scope of directive would hurt ongoing efforts to manage climate risk across the Eurosystem.

One such effort, announced in 2022, was a move to limit the share of bonds from polluting companies that European banks could post as collateral when borrowing money from the ECB.

But it had to give up on that rule, Lagarde explained, “mainly owing to the lack of granular climate data available for the collateral-eligible universe of corporate bonds – for instance on company-level emissions – and the related challenges in allocating companies to sectors”.

A groundbreaking new ‘Climate Factor’

The subsequent rethink led to another big announcement this summer: the introduction of a ‘climate factor’ into collateral requirements.

From late 2026, the ECB will assign lower values to bonds from companies exposed to climate risk, based on data from the 2024 Eurosystem climate stress test and ECB climate scores.

“The climate factor could reduce the effective collateral value of these assets based on sector, issuer and asset specific data, providing a buffer against the uncertain financial impacts of the green transition,” explained Lagarde.

In other words, debt linked to polluting businesses could be worth less to banks when they apply for money from the ECB. And that’s likely to drive up borrowing costs for those businesses over time.

Unlike the ECB’s statements about the CSRD, the climate factor was announced by the bank’s governing council, which comprises the governors of all central banks within the Eurozone.

Jakob Thomae, founder of climate think-tank Theia Finance Labs, says this is “noteworthy” because it suggests the measure “reflects the positions of the majority of those different national banks, not just Lagarde or the ECB”.

This is not its first intervention on climate.

In 2022, the supervisor started favouring greener companies in its now-defunct quantitative easing programme, in a bid to “gradually decarbonise its corporate bond holdings on a path aligned with the goals of the Paris Agreement”.

The same year, it began applying additional capital requirements to banks that failed to effectively manage their climate and environmental risks.

“But I can’t think of another example of a Western central bank being as granular with its collateral requirements as it is with this climate factor,” says Thomae, who first called on the ECB to make such a move in a 2014 paper.

“We’re really talking here about specific sectors and companies, rather than more established risk categories like market segments or asset classes.”

Climate litigation risk impacts loan terms

To support the idea that financial risk can be calculated along entity and sectoral lines, the ECB needs to establish a body of evidence.

Enter its latest white paper.

Published in August, it explores if and how climate-related lawsuits influence firms’ cost of capital.

“Specifically, we investigate whether banks perceive climate litigation risk as a relevant consideration and incorporate it into the pricing and structuring of corporate loan contracts,” explained the authors.

They concluded that there was “strong evidence that the cost of bank loans is higher for firms involved in climate-related lawsuits compared to firms that are not”, adding that other contractual features of loan agreements are also effected.

“The observed deterioration in financing conditions for firms subjected to climate-related litigation underscores the imperative to incentivise the adoption of low-carbon strategies and to proactively manage environmental liabilities,” the paper states.

“Policymakers can leverage these insights to design mechanisms that align financial markets with climate objectives, such as enhanced disclosure requirements and support for sustainable lending practices.

“Future research should explore the long-term implications of these dynamics on financial stability, corporate behaviour, and global climate goals, providing further evidence of the interaction between environmental accountability and economic outcomes.”