Some of the world’s largest banks – including Lloyds, Barclays, and ING – are developing methodologies to analyze and score company climate transition plans. According to a recent article from Responsible Investor, banks are increasingly factoring company transition plans into their investment criteria to both mitigate climate risk among their holdings and meet their own decarbonization goals. The article states that:
“All the globally systemically important banks (G-SIBs) apart from those in China have made some sort of net zero commitment at group or subsidiary level, and investors, supervisors and regulators are providing significant external pressure for banks to decarbonise their lending portfolios. With this in mind, banks are beginning to develop assessments for customer transitions, both to hit their own emission targets and to reduce climate risk in their lending portfolios.”
The banking industry is particularly sensitive to climate-related disruption. As physical and transition risks manifest for companies across the globe, those hit the hardest may find themselves unable to fulfill their loan obligations. This makes the risk of default higher among companies with no transition planning in place as they may find themselves unable to mitigate the worst risks of the world’s changing climate. In the future, banks may even condition lending upon the existence and execution of a company’s transition plans. It is unknown if banks will develop uniform standards for reviewing transition plans or continue to use their own separate methodologies. However, this is one more reason for companies to develop and implement credible transition plans, as access to finance may hinge on them in the future.
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