Lenders and insurers to ramp up use of corporate climate plans in pricing decisions

Credit ratings agencies have already started evaluating credibility of transition plans

There is set to be a major leap in the number of banks and insurers factoring companies’ climate transition plans into pricing decisions.

According to a survey conducted by influential central banking body, the Network for Greening the Financial System (NGFS), just 16% of lenders and insurers currently consider the information published in transition plans when deciding how to price financial products.

However, more than half (56%) said they planned to do so in future.

It is increasingly common for large companies to publish an overview of how they expect to decarbonise their business over time, but there is little standardization or rigor to the process.

Last week, the UK launched new guidance on best practice for climate transition plans, which will be made mandatory in many jurisdictions over coming years. The International Sustainability Standards Board requires the disclosure of such plans, and the EU and Switzerland are among those introducing laws that go beyond transparency, mandating the creation and implementation of net-zero plans.

In a report published yesterday, NGFS discussed the results of a survey of 37 major banks and insurers, which explored how they viewed real-economy companies’ transition plans.

Half already use the data within them to identify investment opportunities, and 40% use them as “a leading indicator of potential change in the business profile of the clients” it said.

“Only a few institutions reported to assess capital expenditure based on information from non-financial firms’ transition plans,” it noted. “As transition plans could inform forward-looking investment decisions, information on capital expenditure and trajectories are expected to become more relevant as a use for financial institutions going forward.”

The report highlighted the tendency for transition plans to focus on a single climate scenario, rather than addressing how the company would respond to different possible outcomes, including catastrophic levels of climate change.

“Little mention was made about assessing the ability of non-financial firms to follow through on their transition plans,” said NGFS, adding that this may become a bigger priority area in the future. However, it suggested: “This could be a second-order concern, given the aforementioned challenges in obtaining any useful information at all.”

Credit ratings giant Moody’s recently launched a tool to evaluate corporate transition plans, with a focus on how likely they are to execute on the strategies.

In a briefing this week, Tom Sanzillo, a director at the Institute for Energy Economics and Financial Analysis, said the tool provided “information that can be used as part of the credit rating analysis” in future.