Section 7 – Application and approval phase

Module 14 – Climate risk clauses and action plans

Due diligence insights can be turned into direct action through well-crafted climate risk clauses in credit agreements. These can align institutional lending terms with identified risk levels and encourage proactive client responses. The following principles can guide the creation and inclusion of credit agreement climate risk clauses or action plans, based on insights generated by due diligence.

• Materiality
  Where due diligence identifies climate risks as highly material, climate clauses can make financing contingent on the client satisfying active climate risk management conditions. While such inclusions may be uncommon or sensitive, it is vital for FIs to recognise elevated climate risks and proactively engage with clients to address them, reducing the likelihood of future defaults or losses. At the minimum, the findings and proposed mitigation/adaptation measures should be discussed with the client. Where clauses or action plans are not included in the loan documentation, the rationale for doing so should be documented for recordkeeping purpose.

  For example, if Guidance 4b flags that an asset is highly exposed to coastal flood risk, the credit agreement may contain a clause or action plan requiring the client to maintain adequate flood insurance or implement appropriate adaptation measures. The adaptation or mitigation measures may also be included as the credit package for the client.

• Proportionality and calibration
  Clause stringency and scope should match both the severity and uncertainty of the risk identified.

  For example, in Guidance 6b, climate risks flagged ‘Green/Amber’ may not require any clauses. However, ‘Red’ flagged transactions could include soft commitments, such as requiring transparent disclosures. In cases where extremely material risks are flagged, hard commitments, such as time-bound adaptation measures or disbursement conditions, may be required where possible. To ensure adoption of these, especially the hard commitments, other factors such as senior management commitment and relationship teams buy-in on the importance of climate risks is important as they will champion the implementation of these requirements.

• Specificity and relevance
  Clauses should address the type of risk or opportunity identified.

  For example, physical risk flags could trigger clauses on resilience and insurance. Transition risk flags could require commitments on emissions reduction or transition planning. Where data quality is flagged, clauses could require enhanced disclosures and third-party audits.

• Forward-looking and adaptive
  Clauses should account for the evolving nature of climate risk, by including periodic reviews, milestone updates or adjustment triggers.

  For example, if scenario analysis indicates risks could increase over the loan tenor, clauses could require annual climate risk reviews and clause renegotiation if thresholds are breached. Expectations should be shared with clients upfront, with collaborative action plans developed to address concerns (see Module 14).

• Enforceability and monitorability
  Include only clauses that the lender can monitor and enforce, supported by clear reporting requirements and practical performance indicators.

  For example, require clients to provide annual evidence of maintained flood insurance or, if unavailable, a self-attestation form with photographs showing the physical adaptation measures implemented.

• Clarity, simplicity and consistency
  Write clauses in plain language to avoid ambiguity and support compliance. Apply consistent principles across transactions for effective sector and portfolio-level monitoring.
• Positive incentives
  Where possible, frame clauses as measures of best practice and futureproofing, helping to align client interests with the institution’s climate goals. Link to climate opportunities where possible (see Module 7).

• Set minimum standards with additional project-specific clauses
  Define baseline clause types for common risk scenarios, while allowing for additional or stronger provisions to be applied in higher risk or unique cases.

Guidance 11: Example climate risk clauses

Guidance 11 illustrates how insights from climate risk due diligence can be translated into specific, actionable clauses within credit agreements. These examples are intended as practical guidance rather than prescriptive rules, helping institutions to integrate climate considerations into contracts in a way that is proportionate, enforceable and aligned with risk management objectives. All clauses should be reviewed by legal counsel to ensure compliance with local regulations and lending practices.

Communicating climate action requirements to clients

FIs are justified in asking clients to prepare Climate Action Plans (CAPs) when climate risks are material to their project or sector. These requirements are not intended to replace client governance but to encourage leadership towards more sustainable and climate-resilient business models.

For institutions, the role is to set minimum credible expectations for climate risk management and transparency, while acknowledging clients remain primarily accountable to their own boards, regulators and investors. In many cases, client stakeholders will share similar expectations, particularly where all parties are working towards alignment with international standards (see Module 23).

Many FIs already require E&S Action Plans (ESAPs) from their clients. CAPs can be integrated into the ESAP, helping institutions to manage their own risk profile and demonstrate regulatory alignment. Expectations should be proportionate to the materiality of climate risks and the capacity of the client, and should be transparent, consistent and achievable.

Within this framework, FIs can mandate the following from clients:

1. Where due diligence identifies elevated risk or size thresholds, a credible CAP may be developed and discussed in the credit memo as a condition of the approval. Each deliverable should include:

• Stated climate ambitions, for example, emissions targets
• A summary of key physical and transition risks identified
• An outline of management actions and responsibilities
• A deliverable timeline

2. Climate-related covenants can require:

• Annual updates on CAP progress
• Disclosure of key climate metrics, such as GHG emissions inventories, where applicable
• Notification if material changes occur
• Agreed remedial actions if specific milestones are not met

FIs may offer CAP templates and technical guidance and should clearly set out the consequences of non-compliance. Clients that already produce climate or sustainability-related disclosures may be exempted from preparing a separate CAP, provided their existing disclosures address the required criteria listed for inclusion.

Tools 3a and 3b: Climate action plan and risk appetite templates

Tools 3a and 3b outline the key sections for developing CAP templates for clients. Each section – from strategic ambition to monitoring and evaluation – ensures plans are realistic and evidence-based. Applying these criteria, can help nudge clients towards alignment with the institution’s own climate risk appetite and climate-related targets.

Tool 3b presents best practices for developing risk appetite statement, including sections and metrics that can be used.

Tool 3c: Climate action plan (CAP) template

Tool 3c offers a sample structure for a CAP template, aligned with best practice guidance for recommendations for ensuring clients systematically address climate. The CAP can be attached to credit agreements or used for ongoing monitoring.

See also the E&S Action Plan (ESAP) template from the BII ESG Toolkit for Financial Institutions.

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