Climate Risks in the Loan Portfolio: Why Reliable Data Matters Now

1.5 Degrees Remains the Goal, Even if Policy Lags Behind

Since the 1980s, the rate of global warming has roughly doubled. The Intergovernmental Panel on Climate Change (IPCC) warns that climate tipping points could be irreversibly crossed at just 1.5 degrees of warming. A breakdown of the Atlantic circulation system, for example, would have serious consequences: more extreme weather in Europe, disrupted ecosystems in the North Atlantic, and faster sea level rise along the US coast.

These developments are not just ecological threats, but economic ones too. For banks, they mean growing physical risks in loan portfolios, reduced insurability of assets, and potential instability in financial markets.

Banks as Climate Actors: Financed Emissions in Focus

In this context, banks’ financing and investment decisions play a crucial role. Financed emissions, meaning greenhouse gas emissions that are caused indirectly through loans and investments, allow banks to significantly influence the emissions pathway of the real economy (Scope 3.15 under the GHG Protocol).

These emissions often represent more than 90 percent of a bank’s carbon footprint but are frequently overlooked. At the same time, they are a powerful lever for effective decarbonisation and risk reduction. High financed emissions result in higher transition risks in loan portfolios, while continued financing of high emitting sectors increases physical climate risks as well.

A recent study by BaFin shows that only a few financial institutions currently use early warning indicators to identify physical and transition risks. Banks that ignore climate risks today not only increase their exposure but also miss the opportunity to take a proactive role in shaping the transition.

The Core Challenge: A Lack of Reliable Data

One of the biggest challenges in managing financed emissions is the lack of reliable data, especially in the SME segment. High costs, complex data collection processes, and limited ESG reporting capacity on the part of many small and medium sized companies make access to accurate information difficult. There are also gaps in disclosure and reporting requirements.

For banks, this means transition risks often remain unclear and are difficult to quantify across portfolios. As a result, well informed decisions on green lending are limited. In this way, poor emissions data becomes a growing financial risk.

A Regulatory Setback: A False Sense of Security

The European Commission’s draft of the Omnibus IV Simplification Package from May 2025 has sparked controversy. It proposes removing the requirement for companies to publish climate transition plans, a provision previously included in both the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). If the draft becomes law, companies would only have to publish such plans if they choose to do so voluntarily.

While this may reduce administrative burdens in the short term, it would also limit transparency and weaken control over climate action in the long term. The European Central Bank (ECB) has already warned of significant risks from drastically reduced sustainability reporting obligations. Key information such as physical or transition risks could become much harder to access.

But climate change does not wait for regulation. Major insurers such as Allianz warn that without decisive climate action, some sectors may become uninsurable in the future, with serious consequences for the entire financial system.

From Data to Transition Planning

Reliable emissions data is the foundation for a strong transition plan. Such a plan enables banks to measure, manage, and reduce financed emissions over time. Guidance from the European Banking Authority (EBA) provides practical support for integrating climate considerations into strategy and risk management. Even as regulatory pressure may temporarily ease, expectations from stakeholders including investors, employees, and customers remain high.

A solid transition plan not only reduces transition risks in the portfolio but also opens new business opportunities. These include transparent sustainability communication, measurable contributions to decarbonisation, and targeted lending to future oriented sectors. A study by KfW Research and BCG highlights the immense potential: by 2030, the global investment need for climate action will exceed 27 trillion US dollars.

Conclusion: Recognizing Responsibility, Acting with Purpose

Climate change is not a distant threat. Its consequences are already being felt in the form of physical risks, reputational risks, and economic disruption. Banks that invest today in transparent data, climate risk analysis, and strategic action will strengthen their resilience and position themselves as future ready institutions.

With platforms like Deedster’s Financed Emissions solution for SMEs, the entry point is simple and effective. The time to act is now. Those who begin today will gain credibility, stability, and competitive advantage tomorrow.