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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 established a Sustainability Committee, chaired by the Director of External Relations, to further embed sustainability considerations across Paragon and provide a platform for discussion and debate on emerging environmental matters, particularly the emissions generated throughout our value chain.

Green bond

Paragon was the first UK bank to successfully issue a Tier 2 Green Bond, applying the £150 million proceeds towards loans to incentivise landlords to mitigate the impact of climate change.

Green bond

Climate related opportunities

Climate change related opportunities have been and continue to be considered as part of our strategy and we aim to support customers in their transition to a low carbon economy.

Solar powered homes

Mortgages

We have introduced buy-to-let mortgage products to support landlords investing to improve the energy efficiency of their properties.

Sustainable development

Development finance

Our team has developed a range of products which enable property developers to benefit from reduced fees when they commit to building greener homes.

Electric vehicles

Motor finance

Our motor finance loans have now been extended to include funding for customers who want to upgrade to a battery electric powered vehicle.

Financed emissions

To plot a clear path to net zero, we need to understand the emissions we enable through our lending – these are known as our financed emissions. The largest contributor to our financed emissions is our buy-to-let mortgage portfolio where decarbonisation through household energy efficiency measures will play a vital role in the UK’s 2050 net zero ambition. We calculate our buy-to-let financed emissions using the Partnership for Carbon Accounting Financial methodology which estimates CO2 emissions using Energy Performance Certificate data.

Financed emissions: buy-to-let mortgages
Balance £m (properties with matched EPC) 9,775.2
Financed emissions (tonnes CO2 / year) 148,607
Economic intensity (KgCO2/£1m/year) 13,419
Physical intensity (KgCO2/m2/year) 47.24

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 2021 Coverage
EPC Grading A to B 8.1% 88.3%
Grading A to C 37.6% 88.3%
Grading A to E 98.4% 88.3%
Flooding High risk properties 0.7% 100%
High or medium risk properties 2.5% 100%

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.

The Government has committed to upgrade as many homes as possible in the Private Rented Sector and has proposed that new tenancies should have a minimum EPC of C by 2025, extending to all tenancies by 2028. Whilst we fully support the requirement to improve the energy performance of the UK’s housing stock, we believe policy needs to reflect the time and cost required for landlords to upgrade property, as well as the damage that could be caused to rental supply if implementation is rushed or poorly executed.

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 6.89% of companies are in this category.

Indicator Measure 2021 Coverage
Sector Water, sewerage and waste 4.53% 100%
Extractive industries 2.35% 100%
Power generation 0.01% 100%
Total carbon intensive industries 6.89% 100%

Measures addressing other risk elements including those in other business streams, for example, classifications of business assets and motor vehicles financed by environmental impacts, and classification of development finance projects by environmental rating, are under development and continue to evolve.

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

The Taskforce on Climate-related Financial Disclosures (TCFD) framework sets out the main themes which companies should cover in their reporting on climate change and this will become mandatory for Paragon from the financial year ending 30 September 2022.

Further information is included on pages 57 to 59 of the 2021 Annual Report and Accounts.

Green charter

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