ING is calling for banks to be more transparent in the way they assess clients' transition plans to ensure consistency across the financial sector as sector targets and transition pathways to net zero increasingly influence lending.
The Dutch bank in January published its Client Transition Plan methodology in a white paper that outlines how it assesses transition plans using scores that are embedded in the bank's decision-making process.
Barclays last week published similar details of its Client Transition Framework in its annual report, but not all banks are forthcoming after rising geopolitical tensions prompted the exit in December and January of US and Canadian banks from the UN-sponsored Net-Zero Banking Alliance.
"I think the banking sector as a whole needs to develop our risk tooling and modelling for transition," said Jacomijn Vels, global head of ING's sustainable solutions group. "When we talk about credit risk, we have huge historical data and detailed models to predict credit losses. Transition risk cannot rely on the same historical data, which is exactly why we're starting it."
Vels was global head of ING's sustainable finance team, which was renamed the sustainable solutions group on January 1 after the bank merged two sustainability-focused teams in the wholesale bank to integrate its sustainability strategy and bring a stronger sector-based focus to the team's work.
ING said in the white paper that its CTP approach, methodology and internal scores are still in the early stages and need further development but it is sharing its methodology with the market "in a spirit of humility" to give encouragement and confidence to others that it is worth doing.
The bank has been using its "Terra approach" since 2018 to steer the most carbon-intensive parts of its loan book to net-zero emissions by 2050 and also started assessing around 2,000 clients' transition plans in 2023 using public information to generate CTP scores that were embedded into approval and engagement processes last year.
ING is now using the scores to identify clients that are making progress – or not – on transition and next year will stop doing business with clients that have not shown progress for two consecutive years.
"Having first assessed the CTPs, the next step is to monitor progress. We want to engage with clients throughout, while also engaging with those that are non-aligned, and encouraging them to transition with us," Vels said.
ING has used its scoring methodology to define criteria for a credible transition plan. That includes emissions reporting, commitments and targets to decarbonise, an action plan to meet the targets and governance to execute the plans.
Combining its Terra approach to portfolio decarbonisation with the CTP allows ING to support clients in hard-to-abate sectors with advanced transition plans.
"In a difficult sector, which has its challenges to transition, it gives you an extra dimension if you know that this client is working on an advanced transition plan," Vels said.
Hot topic
How to assess transition plans and sector pathways is a hot topic in the market, particularly in the UK, which is aiming to become a leader in transition finance. The Transition Finance Market Review was published in October, building on the work of the Transition Plan Taskforce.
Financial trade associations, including the Loan Market Association, urged the UK government in February to focus on a national transition plan and sectoral decarbonisation pathways as well as transition finance products rather than creating a UK green taxonomy. The government has signalled the launch of a transition plan consultation in the first half of 2025.
Barclays is also using its CTF assessment to evaluate clients' transition progress and inform the bank's approach to reducing financed emissions as well as its client engagement and decision-making. The assessments look at the ambition of transition plans, including alignment with Barclays own emissions reduction targets and 1.5C scenario benchmarks, as well as the credibility of the plans and the likelihood they will be met.
Combining these scores these gives an overall CTF score from T1 (best) to T5 (worst). Barclays started engaging with companies with lower scores in 2023 and used the scores to assess transition plans and trajectories last year for clients in its power, upstream energy, steel, cement, automotive and aviation portfolios.
The bank saw a net improvement in scores in 2024, reflecting enhanced transition plans and better data collection, and said that more clients have reduced Scope 1 and 2 emissions than increased them.
Although relatively few banks provide this level of transparency, investors are already starting to distinguish between those that do and do not and are already using the data.
"We continue to believe the banks' disclosures on industry sectoral exposures are the best sources of data ... We use this as a key underpinning for our own engagements with financial institutions," Anna Rudgard and Yacine El-Mohri, fixed-income analysts at Brown Advisory, said in a report.