What is a climate transition plan? A guide for mortgage lenders

Mortgage Lenders

Climate risks are reshaping the financial landscape, and for mortgage lenders in the UK, a well-structured climate transition plan is no longer optional – it’s essential. 

But what exactly is a transition plan, and why is it critical for lenders today?

In this article we’ll cover:

  1. What exactly is a climate transition plan?
  2. Why do you need a climate transition plan?
  3. Understanding the risk of mortgaged emissions in climate transition plans
  4. Where to start with climate transition planning? Data quality is critical
  5. Reporting to the regulator and meeting compliance obligations
  6. What next? Get a personalised assessment of your climate transition plan

What exactly is a climate transition plan?

Mortgage lenders are facing growing pressure to mitigate climate-related risks, particularly those tied to the energy inefficiency of homes. 

A clear strategy communicates to investors, regulators and consumers that your financial planning is responsible and knows how to mitigate these risks.

And a climate transition plan is how to respond to these demands transparently.

The UK government’s Transition Plan Taskforce (TPT) framework has formalised the expectations around these plans. While still a work in progress, it defines climate transition plans as a roadmap of specific goals and actions, set against targets, to achieve net zero, becoming the ‘gold standard’ for the UK.

A robust transition plan also prepares lenders for tightening regulatory standards and disclosure requirements such as under ISSB’s IFRS S2, which requires lenders with available plans to disclose them publicly.

While the tools are in many ways available for lenders to either get started with or improve their climate plans, we’ve found that only 5% of UK lenders are fully aligned with the TPT. With so much ground to cover, smart lenders are preparing now.

Why do you need a climate transition plan?

At its core, a climate transition plan is designed to reduce a company’s carbon footprint while managing exposure to climate risks.

However, a robust climate transition plan is far more than a set of aspirational goals. It is a strategic document that incorporates specific targets, actionable steps, and a timeline for doing so.

For mortgage lenders, this primarily involves addressing the energy efficiency of properties within their portfolios, as these represent the bulk of their climate risk.

The risk largely stems from tightening regulatory requirements. Whilst previous government policy has been inconsistent, a new Labour government has brought with it renewed commitment to national climate goals, meaning that regulations such as the Minimum Energy Efficiency Standards (MEES) are firmly back on the table

Market regulation may now finally start to align with the Climate Change Committee’s pathway to net zero for residential property, which states clearly that we need a reduction in UK emissions of 78% by 2035 relative to 1990.

As of 2024, under the International Financial Reporting Standards (IFRS) S2 (which has taken over from TCFD), lenders are required to measure and report on climate risks within the mortgage portfolio, including stress testing transition risk exposure, which previously was not mandatory. 

While climate transition plans per se are not yet mandatory for lenders, the components part are, with stricter requirements expected over time. Rather than relying on disparate divisions responding to climate challenges in their own way, it makes sense to build a unifying strategy to the risks, challenges and reporting requirements that climate change presents.

Understanding the risk of mortgaged emissions in climate transition plans

A large proportion of scope 3 financed emissions stem from the energy inefficiency of UK homes. We found that, on average, over 58% of the homes in a typical mortgage portfolio are below an Energy Performance Certificate (EPC) rating of C​.

This poses significant risks to portfolios, as policies such as MEES will quickly penalise inefficient properties.

For mortgage portfolio and risk managers, this creates a new layer of exposure. If properties within a lender’s portfolio fail to meet future efficiency standards, they may become stranded assets – unable to be sold or re-mortgaged, in turn increasing financial instability. 

That’s not to say that all properties below EPC C represent a challenge. The reliance on a single data point (EPC rating) to measure risk exposure is one flaw in most lender transition plans written so far and has led to scaremongering headlines of the great challenge of improving almost 6 out of 10 UK properties to an energy efficient standard. 

In reality many homes are already efficient, some may be hard to improve, but millions more are able to achieve efficiency with an affordable investment when set against the benefits available and the value of the asset.  

Kamma’s analysis of over 200,000 rental properties found that 84% of those below EPC C could achieve that minimum standard for an investment that was less than 5% of the asset value. Considering the benefits in energy saving, emissions reduction and with many studies pointing to a valuation uplift, it may not be as expensive a challenge as some commentators have described.

This is only one, albeit highly consequential, example of why managing transition risk through an actionable climate plan – supported by accurate data – is essential for minimising exposure and protecting long-term portfolio value.

Where to start with climate transition planning? Data quality is critical

Effective climate transition planning is data-driven. 

For portfolio and data managers, risks and opportunities are myriad, but the biggest challenge is acquiring accurate and comprehensive information on the energy efficiency and emissions profile of properties. 

As noted in our industry report, over 90% of ESG professionals in the industry cited data quality as their top challenge in climate transition planning. 

And the average mortgage portfolio lacks valid EPC data for 35% of loans, making it difficult to calculate financed emissions and set realistic targets.

In response to this challenge, leading mortgage lenders are turning to predictive modelling to fill the gaps where EPC data is missing. By using advanced geospatial data and machine learning, lenders can estimate the energy efficiency of properties, in the end improving the accuracy of their financed emissions calculations​ and PCAF scores. Find out more.

Reporting to the regulator and meeting compliance obligations

Regulatory reporting and disclosures is another area where climate transition plans come into play. 

Under the new IFRS standards, lenders must disclose their climate risks and transition strategies, including how they plan to reduce their portfolio’s emissions.

One of the key components of regulatory reporting and disclosures is transparency. A lender’s climate transition plan must clearly communicate progress towards decarbonisation targets and disclose dependencies, such as government policies or market changes, that could impact the lender’s ability to meet these targets. In our analysis, only 10% of UK mortgage lenders who reported on climate have quantified these external dependencies, a critical step in setting realistic, actionable goals​.

A climate plan helps you aim when shooting for the moon

A common challenge is striking the right balance between ambitious climate targets and realistic outcomes. While setting aggressive, science-based net zero goals can help to demonstrate leadership, missing them consistently means more clean up work later, and questions your business model.

In our industry survey, 64% of lenders indicated that setting realistic targets is an area where improvement is needed​. 

Deploying scenario analysis and stress testing is essential for determining the range of outcomes based on varying external factors, such as government intervention or advances in energy efficiency technology, in the end helping to set ambitious yet achievable targets.

What next?

To reiterate, for UK mortgage lenders, climate transition plans are no longer optional – they are a critical element of managing both regulatory compliance and financial risk.

These plans serve as a blueprint for reducing scope 3 emissions, improving the energy efficiency of housing stock, and ultimately protecting the financial stability of mortgage portfolios.

As we move towards 2025, the lenders who lead the way on these indicators will not only meet regulatory requirements and build resilience, but also gain a competitive edge. 

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