Climate transition plans for banks – Moving from ambition to implementation

More than a decade after the Paris Agreement was adopted, climate pledges are no longer scarce. Banks have set net-zero targets, joined international alliances and committed to aligning their lending and investment portfolios with a lower-carbon economy.

At the heart of these commitments lies a more demanding objective: to decarbonise portfolios by reducing greenhouse gas emissions associated not only with banks’ own operations, but above all with the companies, projects and assets they finance.

This is where ambition must meet execution.

The challenge for banks is to identify feasible and credible pathways towards achieving their long-term commitments. This is precisely the purpose of the transition planning process: establishing clear governance structures, measurable interim objectives and practical actions to reduce carbon emissions.

Transition planning is also becoming increasingly urgent.

Climate change is no longer solely an environmental concern; it is also a financial and economic one. Physical risks such as heatwaves and floods are intensifying, including in Luxembourg. Financial markets increasingly recognise these developments as tangible risks capable of affecting asset quality, capital allocation and business models.

At the same time, policy developments, regulatory requirements, technological innovation and changing market expectations are accelerating the transition towards a lower-carbon economy.

For banks, this creates a dual challenge: managing emerging risks while financing the investments needed to support growth and competitiveness.

Against this backdrop, the ABBL, in collaboration with EY Luxembourg, has published a new paper examining how banks in Luxembourg are designing and implementing climate transition plans, where progress has been made, and which challenges and opportunities lie ahead.

The state of the market

The ABBL and EY Luxembourg conducted interviews with nine banks representing a broad range of business models and activities.

These insights were complemented by an analysis of European best practices and the evolving regulatory framework. The findings were structured around five key dimensions of climate transition planning:

• Governance
• Measurement and targets
• Alignment with business strategy
• Decarbonisation levers
• Monitoring and verification

The overall conclusion is encouraging.

Most banks have now established long-term net-zero ambitions, often targeting 2050, and are progressively moving from high-level climate commitments towards more structured implementation.

Climate considerations are increasingly being integrated into governance structures, risk management frameworks, business planning processes and financing decisions.

Yet implementation remains far from straightforward.

Limited data continues to slow progress, with banks facing ongoing challenges in obtaining reliable emissions information, particularly for Scope 3 emissions. Integrating climate considerations into risk frameworks, capital allocation decisions and day-to-day operations also remains a work in progress.

Institutions must simultaneously adapt to a regulatory landscape that continues to evolve.

The paper also highlights the significant opportunities created by transition planning.

By gaining a better understanding of climate-related risks and supporting clients in reducing emissions and adapting their business models, banks can strengthen portfolio quality while contributing to the decarbonisation of the real economy.

Innovative products such as renovation loans, sustainable corporate financing and climate-linked financing solutions demonstrate that climate objectives and economic value creation are not mutually exclusive – they can work together.