Over the past decade, sustainability has been incorporated into banking at different levels. Several banks have set Paris-aligned targets at the institution level, extrapolated them into sector-level targets, and also disclose alignment periodically. The sector-level climate targets for shipping may include emissions intensity targets, absolute emissions targets, alignment to specific pathways (based on, for example, Poseidon Principles trajectories), capital allocation targets, or commitments to specific project types (meeting a certain emission threshold or complying with a certain taxonomy).

Banks are embarking on or expanding efforts to track borrowers’ transition readiness and/or climate reporting efforts. And at the transaction level, sustainability-linked loans, green loans or certain taxonomy-aligned (internal or external) instruments have KPIs that aim to incentivise the transition.

Systematically connecting these layers and translating organisation-level targets into transaction-level requirements could enable a shift in the types or scale of bankable assets and projects that are financed. This should be the focus of the next phase of work.

What connecting the layers would enable

Mechanisms that reconcile sector portfolio targets with transaction structuring cannot exist as a standard product as they depend on several factors (a bank’s climate ambition, risk profile, client profile, regulatory environment, operational jurisdiction, etc.). Where these mechanisms already exist inside individual banks, they tend to be internal, unpublished, and not (yet) systematically applied. Building them requires effort that is non-trivial, and the specifics and complexity differ across sectors and portfolios. But what these mechanisms enable makes the case for investing the time and resources; if not at institutional level, then collaboratively with other sector-specialist financiers to develop best practices. Organised from foundational to emergent, they can enable:

Portfolio steering: Understanding the alignment of incoming and outgoing transactions against stated targets provides insight into a portfolio’s status and directionality. Knowing which transactions pull the portfolio toward or away from a trajectory is itself valuable. Over time, this analysis could shift from being a monitoring exercise to something that actively informs capital allocation.

Time to recalibrate: Early identification of any pathway drift means banks can course-correct intentionally and incrementally, rather than facing sharp adjustments as targets approach. As regulatory expectations tighten (the ECB’s recent supervisory actions being one indicator), this could help institutions avoid setbacks or fines.

Strategic KPI design for sustainability-linked facilities: Margin adjustments are typically within a small range and depending on the size of the facility, may or may not justify the administrative effort and costs (for audits, third-party verification, etc.). Connecting mechanisms could enable banks to offer margin adjustments and other incentives calibrated to a deal’s impact on portfolio- or institutional-level targets.

Signal clarity and consistency: Loan structures and incentives together help articulate banks’ ambitions to borrowers. In constrained markets where several banks may be pursuing the same bankable opportunities, these signals could also help them attract deals aligned with their larger ambitions.

Portfolio-level impact and KPI considerations for a single transaction

Consider a bank with a shipping loan portfolio committed to halving its weighted emissions metric (typically emissions intensity, or absolute emissions) over seven years. The bank is asked to structure a 7-year loan for a package of 10 vessels.

A vessel’s type, age, operational profile, and trade affect its annual emissions, and consequently the portfolio emissions metric. Similarly, financial factors such as the loan amount, vessel valuation and repayment profile impact the contribution of this set of vessels to the portfolio metric over the 7-year loan period.

For this exercise, let’s consider just one of these dimensions: newbuilds versus operating vessels.

All 10 vessels are newbuilds: The vessels are ordered today, deliver in years two and three of the loan, and operate for the remaining four to five years of the tenor. Until delivery, they contribute nothing to the portfolio’s emissions metric. Any emissions KPI question here is forward-looking: the bank must assess what the vessels’ operational emissions will be at delivery and how they will evolve over the loan period.

All 10 vessels are operating today: The transaction contributes to the portfolio metric from day one, and this contribution decreases as the loan is paid off over the tenor. A KPI in this instance would typically be structured against the vessels’ current performance, with agreed improvements over the term of the loan. Here the borrower’s realistic commitment may be closer to modest efficiency gains through operational measures or retrofits.

In both scenarios, the pace of decarbonisation (and the ‘green’ KPI) is typically determined by the borrower’s ambition, or what they can commit to reasonably delivering. Making the link to the bank’s targets explicit rather than implicit and offering more meaningful margin adjustments may allow banks to guide borrowers towards higher ambitions.

Why building connecting mechanisms matters

Data availability, data collection protocols and reporting practices are becoming standardised and more widespread. The natural next step would be to explicitly build the mechanisms connecting the organisational and portfolio-level climate targets to the operational layer. Without these connections, valuable data that is being gathered and processed for disclosures stops short of contributing to portfolio steering or capital allocation decisions. This is a missed opportunity for institutions seeking to meet their climate targets and support the transition.

Could portfolio targets be reached without making these connections? Probably.
Outcomes would then hinge primarily on market shifts and borrower ambitions, and may not align with a bank’s trajectories or timelines.

Would active steering ensure that targets are reached? Maybe not.
But this would help a bank to leverage the data they’ve already been accumulating: not just for reporting, but for greater preparedness and insight into both climate-related risks and emerging opportunities.