UK SRS S2 for Banks: Financed Emissions, Credit Risk and Climate Metrics

Educational practitioner material. Illustrative examples and wording require adaptation and technical review.

For a commercial bank, financed emissions are both a Scope 3 metric and an indicator of exposure to transition risk. UK SRS S2 B58 explains the link to credit, market, reputational, operational and other risks: high-emitting borrowers can be affected by carbon prices, regulation, technology change, demand shifts and financing constraints, which can in turn affect the bank. The metric is therefore useful only when it is connected to the bank's exposure population, risk classification, scenarios, targets and management decisions.

A bank can produce a technically plausible tonnes-of-CO2e calculation and still provide weak investor information. Common failures include an unclear commercial-banking perimeter, gross exposure that cannot be reconciled to finance data, a classification chosen only because the vendor provides it, borrower estimates with no hierarchy, and portfolio targets that use a different boundary from the reported metric. UK SRS S2 requires the architecture around the number to be visible.

The bank architecture visual follows the controlled population from gross exposure through classification and emissions data into credit-risk use, targets, published metrics and review controls.

Paragraph B62 applies to an entity that participates in commercial banking activities. A diversified financial group should not assume that every product automatically belongs in the commercial-banking table or that an organisational segment label is enough. The reporting team should map activities, products, legal entities and systems to the B62 population and separately identify asset-management, insurance, investment-banking, consumer-finance or other activities that are subject to different disclosures or methodologies.

The sustainability disclosures must cover the same reporting entity as the related financial statements under UK SRS S1 paragraph 20. Within that reporting entity, the bank may use activity-specific metric boundaries, but differences must be explained and connected. For example, a consolidated group may have a bank subsidiary, a leasing company and a securities portfolio. The group should show which exposures enter B62, which are reported under another financial-activity disclosure and which are excluded under paragraph 29A or the selected methodology.

B62(b) requires gross exposure to each industry by asset class in the presentation currency of the related financial statements. For funded amounts, gross exposure is the funded carrying amount before subtracting the loss allowance. For undrawn loan commitments, the full amount of the commitment is disclosed separately from the drawn portion. B62(c)(ii) also requires funded gross exposure to exclude the effects of risk mitigants, where applicable.

This definition matters because risk systems often show several different exposure measures: accounting carrying amount, exposure at default, drawn balance, net exposure after collateral, limit, credit-conversion-factor-adjusted exposure or regulatory capital exposure. The B62 denominator should not be selected by convenience. A controlled reconciliation should explain how the UK SRS amount is derived from the financial-statement and commitment populations and why it differs from risk-management measures used elsewhere.

The 2025 amendments removed the fixed requirement to use GICS and introduced B62A. The bank must select an industry-classification system that produces information enabling users to understand exposure to climate-related transition risks. A commonly used system is more likely to support comparability and should be prioritised when it provides equally useful information. The bank must disclose the system used and explain how its selection fulfils that objective.

This is not a free choice with no discipline. The classification should reflect the economic activity driving transition exposure, not merely the legal name of the borrower or the sector recorded for credit administration. A diversified counterparty, holding company or project-finance vehicle can require a documented primary-activity or use-of-proceeds judgement. Overrides should be controlled because they can move both financed emissions and gross exposure between sectors and materially change concentration narratives.

Create a classification hierarchy: use-of-proceeds or project activity where specific, then counterparty principal activity, then a documented fallback.

Define treatment of groups with multiple material activities, holding companies, special-purpose vehicles and sovereign-linked entities.

Maintain a crosswalk from source-system codes to the disclosed taxonomy and version it each year.

Record manual overrides, rationale, approver and impact on sector totals.

Test whether the chosen granularity actually reveals transition-risk concentrations rather than producing dozens of immaterial categories.

Explain any difference between the classification used for commercial banking and insurance activities; B62A permits different systems where justified.

Borrower emissions data will rarely be uniform. Listed corporates may report assured Scope 1 and 2 figures, private borrowers may provide questionnaire data, small businesses may require sector proxies, and project-finance assets may have engineering or production data. UK SRS S2 B40-B56 requires a transparent hierarchy that prioritises direct measurement, primary data, representative and timely secondary data and verified inputs, while recognising that estimation is expected.

The bank should also identify whether borrower Scope 3 emissions are included. B62(a) requires financed emissions to be disaggregated by the financed portion of counterparty Scope 1, Scope 2 and Scope 3 emissions. A portfolio cannot be described as fully covered merely because Scope 1 and 2 estimates exist. Scope-specific coverage, materiality and data limitations should be visible.

The core B62 table combines absolute gross financed emissions and gross exposure by industry and asset class. It should also disclose the percentage of gross exposure included, explain exclusions where coverage is below 100 per cent, show undrawn commitment coverage separately and describe the methodology and allocation method. Paragraph B60 applies the general paragraph 29(a) GHG disclosures to financed emissions, including methods, inputs, assumptions and changes.

Financed emissions do not measure credit risk directly. A high-emitting borrower can have strong transition plans, pricing power or short-tenor exposure, while a lower current emitter can be vulnerable to physical hazards or technology disruption. The metric should therefore be used as one input into a broader risk assessment rather than a mechanical risk grade.

A useful bank process connects the financed-emissions population to borrower transition-risk flags, sector pathways, collateral location, tenor, probability of default, loss-given-default assumptions, covenant or engagement actions and concentration limits. UK SRS S2 does not prescribe a specific credit model, but it requires disclosure of the processes used to identify, assess, prioritise and monitor climate risks and how they are integrated into overall risk management. The bank should describe the actual integration evidenced in its systems and governance.

UK SRS S2 requires an entity to use climate-related scenario analysis to assess climate resilience, using an approach commensurate with its circumstances. For a bank, the analysis should be capable of showing how physical and transition pathways affect material portfolios, concentrations and strategic choices. It need not be a single model that produces one precise credit-loss number. A proportionate first cycle can combine portfolio heatmaps, sector pathways, borrower-level analysis for material names and sensitivity of selected finance variables.

Define scenarios and time horizons that relate to the bank’s lending tenor, strategic plan and risk appetite.

Map transition variables such as carbon price, regulation, technology adoption and demand to sectors and borrower cash flows.

Map physical hazards to borrower operations, collateral, supply chains and geographic concentrations.

Identify transmission to revenue, costs, asset values, default risk, collateral values, liquidity and funding.

Assess management actions, including pricing, limits, engagement, product strategy, capital allocation and portfolio change.

Explain assumptions, limitations, data gaps and what the scenarios can and cannot demonstrate.

A bank may set targets for absolute financed emissions, sector intensity, portfolio alignment, client transition-plan coverage, sustainable finance or exposure to high-risk sectors. Paragraphs 33-36 require the metric, objective, boundary, period, base period, milestones, absolute or intensity basis, methodology, performance and revisions to be transparent. A target should not be described as portfolio decarbonisation if the reported reduction mainly reflects loan sales, denominator changes or missing data.

The financed-emissions control framework should be linked to finance and credit controls, not operated as an isolated sustainability spreadsheet. Population completeness, classification, data sourcing, model changes, manual overrides, reconciliations, review evidence and sign-off need defined owners. Because borrower data are often estimated, model governance should focus on transparency, reproducibility and change control rather than demanding false precision.

Banks often use current exposure balances with lagged borrower emissions. That is not automatically a B59A case: the bank first applies the Scope 3 data hierarchy and tests whether reliable same-period estimation is possible. If it remains impracticable after every reasonable effort, the report explains why, describes the measurement approach, inputs and assumptions used for any reported information and provides a plan with a timeline to achieve same-period reporting.

The B59A note should identify the affected portfolios and data periods and sit beside the B62 coverage and methodology information. It should not be hidden in a general 'data limitations' section. Where the bank uses the separate C4 Scope 3 provision, it should state that distinctly alongside its UK SRS S2 compliance statement.

Boundary route: use the Category 15 guide to explain the relationship between the bank table and the wider Scope 3 population.

Timing route: use the B59A guide for lagged borrower data and alternative-period approaches.

Insurance route: apply separate financed-emissions and underwriting logic for bancassurance or mixed groups.

Asset-management route: do not reuse the bank gross-exposure denominator for AUM disclosures without a separate boundary assessment.