ESG & Climate Use Case
OakNorth Bank wanted to understand the most material climate-specific risks to its borrowers and evaluate the possible impact this could have on credit risk in its loan book. It also wanted to be able to report on its findings and start to identify new opportunities to support decarbonization in the economy.
Opportunity and outcomes
In November 2021, OakNorth Bank leveraged the ON Climate Impact Framework to undertake a granular scenario analysis of the possible impact of climate risks in its loan book. Forward-looking scenarios were overlaid on borrowers’ current performance/base case forecasts to generate a forecasted performance for each borrower, that considers constantly evolving impact metrics like carbon tax, over the short term (2025) to target policy year (2050).
OakNorth Bank was able to conclude that while climate risk will have an impact on a number of its borrowers in the short term, only 0.15% of its total book would be directly impacted under the transitional risk assessment, and they can survive across the various scenarios with minimal impact compared to base case.
The analysis and conclusions were detailed in OakNorth Bank’s ICAAP submission and the ESG report within its 2021 Annual Results and received very positive feedback from various stakeholders who said it was one of the most detailed climate change analysis they’d seen from a bank to date.
"We have built our reputation on being a trusted partner to the businesses we lend to. In order to continue being a trusted partner, we need to help them understand where their climate vulnerabilities are and what they can do about it, as well as identify new opportunities to support businesses in their transition to the green economy. The ON Climate Impact Framework is helping us do this."
Head of Credit Risk at OakNorth Bank
Based on the findings from the analysis, OakNorth Bank will continue to assess impact from transition risk scenarios derived from the ON Climate Impact Framework across all its borrowers, including those with minimal / residual impact. It will continue to expand on this analysis, integrating it alongside its full stress testing framework and building out further stress scenarios including coverage of lower risk segments.
Having identified its risk and determined where it wants to play for opportunity, it is now standing up an origination team dedicated to sourcing green businesses who may need funding support, as well as brown businesses which may need funding support to transition their business model.