Loan Origination and Management

The transition to a greener economy creates a significant risk to banks’ existing models of lending. Currently, a credit risk assessment is made by using available data, credit history, and collateral asset value.

Climate pathways, developed by the Intergovernmental Panel for Climate Change (IPCC) demand seismic changes to the economic environment in which credit facilities and loans are made. This means that sectors and industries will see subsidies removed while others replace them as part of the long-term economic vision for governments looking to follow these pathways to a more sustainable future.

At the regular Conference of the Parties (COPs), governments make commitments to align with these pathways, creating their own climate plans, converging with goals and milestones in 2030, 2050, and 2100. The global ambition is to reach ‘net-zero’ by 2050, avoiding environmental trigger points. Each country has defined its own journey and targets, using broadly the same milestones.

Along with the policy intent statements, there are market indicators that are put down by policymakers in terms of supporting infrastructure, subsidies, de-risked investments, and policy priorities. Taken together, these provide a reliable foundation on which to build climate scenarios that can be used to recalculate credit risk, effectively adding likely changes to the credit profile of borrowers from physical, environmental, and transitional policy effects.

GreenCap provides tools that banks need to construct such scenarios, along with the engine to calculate additional risk capital. This additional capital can then be converted into a basis point spread representing the extra interest that obligors must pay to cover specific climate-related credit risks.

GreenCap is more than a pricing engine. The powerful, online reporting within the system tracks loans across industrial sectors, geographic regions, and ratings to give lending officers and their management full transparency into the bank’s progress against its climate goals. The impact of every loan that is entered into the system is displayed along with the sustainability targets, indicating whether it moves the bank towards or away from its ambition in this area.

Transitional credit risks can also be viewed as a measure of the readiness of underlying borrowers to cope with regulations that must be in place to mitigate climate change. From agricultural practices to green building codes, obligors can take steps that significantly reduce the impact of such regulations on their business models. GreenCap provides lenders the tools needed to reflect on early action and reduce the credit capital and basis point spread on the credit facility directly.

This is a requirement under the current rules, where riskiness and pricing have to be audited by a risk governance committee, demonstrating that all efforts have been made to ensure that liquidity of the bank is not put under undue stress from lending at rates that do not cover financing costs incurred by the bank. All climate adaptations are shown, along with the effect on the credit risk, in such an order that the bank not only holds the correct amount of risk capital but also prices each loan accordingly.

GreenCap is a solution that builds credit risk pricing into sustainability planning, allowing auditable, differential, pricing that puts the bank and its environmental ambitions at the heart of this fight against climate change.