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Lending sustainably

Climate change is one of the biggest challenges faced by the world today. The UK Government confirmed its goal of net zero carbon by 2050 in November 2020 and, through our lending decisions, we have a vital role to play in achieving that goal.

The banking regulator, the PRA, has published a Policy Statement, setting out its expectations of the type of strategic approach it expects firms to adopt in managing the financial risks of climate change. We are in the process of completing a plan of work which adheres to the requirements set out and this will continue to be updated as the regulators develop their thinking.

Richard Woodman
Chief Financial Officer
Director responsible for climate change matters


Governance

We have designated climate change as a principal risk within our Risk Management Framework. This means information and measures on climate change risks are considered at board level and the response to these risks is considered within our overall strategy.

We have also set up a climate change working group to embed climate change risk into our operational culture. This group reports to the Enterprise Risk Committee and the Board on a regular basis and work is underway to embed the consideration of climate risk across all our relevant risk sub-committees.


Categorising risk

We categorise the financial risks of climate change associated with lending into two categories - physical risks and transitional risks. Risks in each of these categories may impact over the short, medium or long term.

Physical risks

Physical risks

Climate change and other environmental factors which may, of themselves, increase financial risks. For example, increased flooding risk, which might have an adverse impact on security asset valuations.

Transitional risk

Transitional risks

Regulatory or government pressure on lenders, or other businesses, to reduce the environmental impacts of their product chains, impacting the ability to realise security on an asset or continue business lines.

We already consider many of these issues in our underwriting and credit risk processes and we’re working to further embed the consideration of both forms of risk across all lending.

Climate exposure

Buy-to-let

In buy-to-let, our assessment of exposure to climate risk has focussed initially on the energy performance and flood risk of properties on our loan book.

Indicator Measure 2020 Coverage
EPC Grading A to C 37.7% 85.0%
Grading A to E 98.1% 85.0%
Flooding High risk properties 0.4% 99.0%
High or medium risk properties 2.2% 99.0%

Transitional risk:

The UK Government has announced initiatives to improve energy efficiency and it’s likely that policies based on EPC grades will be used to help the UK’s transition and reduce its property stock’s emissions. Almost all our mortgaged properties are Grade E or above.

Physical risk:

Only a small proportion of our properties are located in medium or high-risk zones for flooding from rivers or sea. Flood risk from other sources is considered in the underwriting process and work is ongoing to incorporate these additional risks into our risk metrics.

SME lending:

In SME lending, limited company customers have been broadly analysed by SIC codes to identify those operating in high carbon intensive industries. Results show 5.3% of companies are in this category.

Indicator Measure 2020 Coverage
Sector Water, sewerage and waste 3.54% 100%
Extractive industries 1.75% 100%
Power generation 0.01% 100%
Total carbon intensive industries 5.30% 100%

We are addressing other risk elements including those in other business streams. These will be aligned to the UK’s new Green Taxonomy announced at the Green Horizon Summit in November.

Future developments

To help us prepare for the future, our climate change strategy also includes:

  • developing climate change scenario analysis and embedding this in stress testing programmes
  • further embedding climate change risk management across the business
  • enhancement of the business’ understanding of the climate change impact of the Group’s lending
  • continued engagement with external climate change initiatives, including involvement in industry initiatives, particularly through the Green Finance Institute
  • development of formal climate related risk appetites and a full suite of Key Risk Indicators and Key Performance Indicators

We expect to report our climate change exposures in accordance with the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD). These are being introduced into UK listing requirements from the financial year ending 30 September 2022.

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