UK: Lending In A Changing Climate

In the past, banks perceived the environmental and social issues associated with their client base as mainly a matter of credit risk, with direct exposure likely to arise only in the event that they were obliged to enforce security or if they otherwise became closely involved in management of a borrower’s business or property.

That relatively simple state is changing rapidly for a number of reasons. These include the introduction of environmental issues into directors duties under the UK Companies Act 2006, the formulation of global and individual bank policies on sustainability, and the growing appreciation of climate change as an issue to be factored into commercial decision making.

Particular issues to consider include:

1. From 1 October 2007 directors will be required to promote the success of the company for the benefit of its members having regard amongst other matters to the impact of its operations on the environment and the community and the desirability of maintaining a reputation for high standards of business.
2. Quoted companies will need to disclose information about environmental and social issues (including about policies on such issues and their effectiveness) to the extent that this information is necessary to understand the future development, performance and position of their business.
3. It will become easier for shareholders to instigate derivative actions for breach of director’s duties. While there are protections which permit the court to filter out unmeritorious claims, this is likely to be a useful new tool for NGOs seeking publicity for their cause.
4. A number of the general principles applicable to regulated entities under the FSA Handbook may become relevant to the management of environmental and social issues. In particular, breach of the general principles could be asserted where a bank’s failure to apply an environmental code of practice results in customer harm or reputational damage resulting in a fall in share price. Currently FSA practice is to consider purely financial issues, but as carbon and other environmental issues begin to be priced, this may well change.
5. Adoption of environmental principles, such as the Equator Principles and the UN Principles of Responsible Investment may be both a way to discharge these obligations, and a potential litigation risk. Third parties adversely affected by a project could assert that they relied upon the lender to enforce World Bank Group policies by virtue of the lender’s adoption of Equator Principles, so lender statements about such issues need to be carefully considered.
6. Now that climate change is generally accepted, it needs to be assimilated into decision making. Lenders will want to consider these risks in their lending decisions and in considering portfolio exposures. Similarly where banks are advising on commercial transactions they will need to be alert to climate related risks and opportunities and the need to make disclosures on them.
7. To mitigate risk, lenders should:

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This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters, or contact the editors.