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How Climate Actions Will Affect Access to Credit

Credit for Climate Action Background Image

The Fourth National Climate Assessment, issued by the U.S. Global Change Research Program, found that climate change is already having an impact on businesses and communities across the United States. The report also found that, without significant global mitigation and adaptation efforts, climate change will inflict increasing disruption and damage. International reports have made similar findings. As a result of these existing and anticipated disruptions, climate change has become a major business concern for many company executives and investors.

Certain members of the financial sector have been proactive in evaluating ways to reduce the greenhouse gas (“GHG”) emissions attributable to their operations and financings, adopting climate governance and risk-management actions at a greater rate than other sectors. In fact, as of this writing, each of the major U.S. banks has made a commitment to “net zero” or “Paris Aligned” reductions in their financed greenhouse gas emissions. As part of this effort, members of the financial sector have both created and joined a series of initiatives designed to better account for their “financed emissions,” or the emissions generated by the operations of entities in which a financial institution invests or to which it lends money.

This trend could have potentially serious implications for the clients of these financial institutions. As financial institutions face increasing pressure to take actions to reduce their financed emissions, they will likely modify their debt and equity portfolios to align with a low-carbon future, and may possibly end up limiting, or avoiding entirely, financing certain categories of high-emission or emission-intensive activities. Such pressure would necessarily affect companies in carbon-intensive sectors that do business with these financial institutions. While there is much uncertainty regarding how these trends will play out, industrial companies, particularly those in the most carbon-intensive sectors, should consider how this potential flight of capital from their sectors creates this potential risks for them and take measures to mitigate those risks.

In this paper, we will examine financial institutions’ motivations for participating in climate-related frameworks, the provisions of such frameworks, and financial institutions’ actions taken so far in response to them. We then conclude with an examination of how companies may be able to enhance or maintain their attractiveness to financial institutions during the transition to a low-carbon future.

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.