This year is set to be an important milestone in the UK’s transition to net zero by 2050. The government and regulators have all published long-awaited plans to inform how corporates and financial institutions should be approaching their own net zero transitions.
Article by: Mark Blackwell, Chief Operating Officer, Cotality UK
Among these are significantly more robust climate-related reporting requirements for companies and financial institutions, including mortgage lenders. These extend the existing Task Force on Climate-related Financial Disclosures (TCFD)-aligned regime and introduce new rules that will become mandatory for many firms during 2026.
Mortgage lenders occupy a unique position in the net zero debate. Unlike companies with direct operational emissions, most of the climate-relevant emissions for lenders arise from financed emissions in lending portfolios, where residential mortgages represent a significant share of Scope 3 emissions. Increasingly, regulators now expect lenders to do more than account for these emissions. They want them to explain how their lending practices, strategies and risk management frameworks support a credible transition to net zero.
At the heart of this shift is a clear expectation that lenders move beyond high-level ambition and demonstrate how net zero commitments translate into action across mortgage portfolios.
The focus is increasingly on evidence: measurable targets, decision-making frameworks and credible implementation strategies that reflect the realities of residential lending.
Importantly, targets need to be accompanied by a clear narrative explaining how they align with a Paris-aligned pathway for housing finance. This is not about adopting generic benchmarks but about articulating how a lender’s specific portfolio, with its regional exposure, property mix and borrower characteristics, can transition over time.
For most lenders, this inevitably brings the housing stock itself into focus. Supporting improvements in energy efficiency, enabling retrofit finance and encouraging upgrades to existing homes are emerging as core components of credible transition strategies. Transition plans are therefore expected to explain how decarbonisation will be achieved in practice through product design, underwriting criteria and borrower engagement.
Integrating climate into core governance
Scrutiny governance is already significantly more forensic, with regulators’ expectations now demanding that climate considerations are embedded in strategic decision-making, not delegated to sustainability teams operating in isolation.
For mortgage lenders, this means that transition planning intersects directly with questions of growth, risk appetite and long-term portfolio quality. Decisions about product mix, pricing incentives and exposure to different segments of the housing market increasingly carry climate implications. Effective governance ensures that these trade-offs are recognised and managed deliberately.
Climate transition planning also brings renewed focus to risk management. Residential mortgage portfolios are exposed to a range of climate-related risks, both physical and transitional. Flooding, heat stress and other physical hazards can affect property values and borrower resilience. At the same time, transition risks such as policy changes, technology shifts and evolving consumer behaviour, can reshape demand and asset performance over time.
A robust transition plan should therefore demonstrate how a lender identifies, assesses and, where possible, quantifies climate-related risks across its loan book. This includes explaining how climate risk is integrated into existing credit and risk frameworks, rather than treated as a parallel exercise.
Scenario analysis and stress testing play a critical role here. By assessing portfolio resilience under different transition pathways, lenders can better understand where vulnerabilities may emerge and how strategy may need to adapt. Supervisors, including the Bank of England through the Prudential Regulation Authority, have been clear that climate risk should be embedded within governance and risk management structures. While transition plans are not themselves risk frameworks, inconsistency between the two will be increasingly difficult to justify.
Data transparency and strategic capability
Quantitative metrics sit at the core of both climate-related financial disclosures and transition planning. Mortgage lenders are expected to disclose baseline financed emissions, explain the methodologies used to calculate them and track progress toward interim and long-term targets.
However, metrics only add value if they are interpretable and verifiable. This is leading many to focus on extracting data that describes how their portfolios are changing over time and how decisions around product incentives or changes in underwriting influence outcomes. The implications for lending strategy and capability are huge – with more real-time and granular data to understand risk exposures, lenders can also be smarter about how they deploy capital.
Equally important is transparency about limitations. Data gaps, modelling assumptions and uncertainties are an inherent part of financed emissions measurement in residential lending. Acknowledging these challenges is vital, but it’s also possible to demonstrate the quantifiable impact of filling those gaps by working with third party data providers.
The direction of travel is clear. Lenders that treat transition planning as a strategic exercise, embedding it into governance, risk management and lending strategy will be better positioned to manage long-term risks and capture emerging opportunities in a changing housing market. Those who approach it as a compliance exercise risk falling behind, not only regulatory expectations but the structural shifts reshaping UK housing finance.
