The EBC paper analyses the exposure to climate risk of ABS, an asset class frequently pledged as collateral in the European Central Bank (ECB) refinancing operations.

Climate Risk Measurement of Assets Eligible as Collateral for Refinancing Operations –
focuses on Asset Backed Securities (ABS) backed by auto loans or loans granted to Small and Medium Enterprises (SMEs) and explores ways to measure their climate risk based on the characteristics of the underlying loans, using existing loan-level data requirements.

This study is largely determined by two aspects: the quantity and quality of the extra-financial information accompanying the ABS, as well as the possibility of linking them to external databases relating to an exposure or a climate impact.

The ultimate goal was to come up with an alignment metric, i.e. to judge whether ABS related emissions would meet the Paris Agreements objectives, a task hindered by the lack of data available.

Despite these limits, the ECB’s study gives relevant indicators related to ABS carbon impact, enabling the computation of ABS climate related risk proxies. Without necessarily being able to measure a concrete impact, the study carved a series of indicators to serve as a reference.

However, it concludes that an improved and harmonized framework for the provision of non-financial information seems essential to achieve an accurate analysis and monitoring of the financial sector’s exposure to climate change.

Climate risk of ABS

Climate Risk Measurement of Assets Eligible as Collateral for Refinancing Operations –
Focus on Asset Backed Securities (ABS)
Climate Risk Measurement of Assets Eligible as Collateral for Refinancing Operations –
Focus on Asset Backed Securities (ABS)

“As an example, we calculated normalized indicators of the carbon intensity8 of loans that underlie an ABS. In the correlograms below, each point corresponds to one ABS. We show how the intensities are distributed amongst ABSs, and how their higher order moments are linked with each other. For Auto ABS we note strong correlations between statistical moments, indicating the tendency for instance that ABSs with high mean intensity are skewed to the right and have heavy tails.

This would suggest that some ABSs have many standard vehicles, and a number of highly polluting vehicles, high above the intensity referential (SUVs, perhaps). There is, at this stage, no strong evidence of selection criteria based on the loans related carbon intensity.”

Climate Risk Measurement of Assets Eligible as Collateral for Refinancing Operations – Focus on Asset Backed Securities (ABS) is available here.

Source: Banque de France – Climate Risk Measurement of Assets Eligible as Collateral for Refinancing Operations – Focus on Asset Backed Securities (ABS)