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New Research: “The role of central banks’ credit rating in mitigating climate and environmental risk”

New research by Positive Money Europe and WWF proposes expanding the role of Eurosystem’s own internal credit assessment systems, the so-called ICASs, to integrate climate and environmental risks.
New Research: “The role of central banks’ credit rating in mitigating climate and environmental risk”

New research by Positive Money Europe and WWF proposes expanding the role of Eurosystem’s own internal credit assessment systems, the so-called ICASs, to integrate climate and environmental risks. We see the increasing role and potential of C&E risk integration into ICASs as a concrete, workable and impactful way to green the collateral framework.

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The Eurosystem is legally required to provide credit to market participants only against adequate collateral to minimise risks to its balance sheet and ensure smooth transmission of monetary policy. 

The Eurosystem’s own in-house credit assessment systems (ICASs) constitute one of the three sources of credit assessment of the Eurosystem Credit Assessment Framework (ECAF). ICASs are tasked with assessing the collateral quality of credit claims, which are in essence bank loans to firms of different sizes, including SMEs. Currently, credit quality is assessed, with exceptions, predominantly based on the financial health of the balance sheet of the firm. 

With this paper, we aim to add ambition to the ECB’s climate action roadmap by expanding the role of Eurosystem’s ICASs to include the climate and environmental (C&E) risk assessment. Doing so should also decrease over-reliance on third-party rating agencies to mitigate C&E risks in central banks’ balance sheets.

We find the setup and the process of ICAS assessment to be highly suitable for C&E risk integration. Furthermore, ICASs assessment is a potentially less biased and more consistent source than that by the private-sector ESG providers. Particularly, for a large number of SMEs, ICAS assessment could serve as a credible, neutral and free resource of C&E risk assessment.

The policy recommendations we put forward in the paper should be considered as a roadmap with some actions realisable now and some over the medium-term. Greening the collateral framework has great potential not only for risk mitigation in the Eurosystem’s own balance sheet, but beyond, to more closely align the whole financial system to the Paris Climate Agreement and the upcoming Global Biodiversity Framework.  

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