Capital markets are evolving: How will ESG risks be incorporated into bank loan assessments from 2026? - Article

March is a critical period when companies renew their credit lines with banks and exchange documentation related to their annual financial statements. As international regulators increasingly incorporate climate- and sustainability-related risks into their supervisory frameworks, banks are also gradually revising their credit assessment methodologies.

In this article, we explain, from a CFO’s perspective, how ESG factors are being integrated into banks’ risk models and what preparatory steps companies should take during this period.

1. Changes in Banking Risk Models

1.1 Traditional Financial Ratio-Based Assessment

In the past, bank loan assessments were primarily based on a company’s historical financial performance and debt repayment capacity, including the following metrics:

Liquidity ratios (e.g., current ratio)
Leverage ratio
EBITDA and interest coverage ratio
Stability of operating cash flow

The core objective of these metrics is to evaluate a company’s past and current ability to service its debt. However, many of these models are based on the assumption that future performance can be inferred from historical data.

1.2 Integration of Climate and Transition Risks

In recent years, the Bank for International Settlements (BIS) and the Financial Stability Board (FSB) have repeatedly emphasized that climate risk is not merely an environmental issue, but a financial one.

Factors such as climate transition costs, carbon pricing mechanisms, and energy price volatility can directly affect a company’s future cash flows. As a result, banks are beginning to incorporate these risks into their credit assessment models, particularly when a company’s business model relies heavily on high-carbon processes or lacks sufficient investment capacity for transition.

This shift reflects a broader change in focus—from evaluating “past performance” to assessing “future risk resilience.”

1.3 Contribution of Social and Governance Factors to Credit Assessment

In addition to climate risk, banks are also paying increasing attention to factors such as key personnel turnover, material governance issues, and board-level risk oversight. These elements are important because organizational stability and governance quality directly affect a company’s ability to sustain its operations.

If such risks are not properly disclosed or managed, banks may treat them as potential credit risks.

Image source: FREEPIK

2. Three Key Risks Banks Focus On

(1) Transition Costs (Carbon Tax, Equipment Upgrades)

If a company needs to upgrade its equipment due to carbon tax policies or market requirements, this will impact its capital expenditures (CAPEX) and operating costs.

Banks focus not only on the costs themselves but also on the following points:

Have transition-related expenses been quantified?
Has the impact on EBITDA been assessed?
Have funding plans and payback period projections been established?

If a company cannot explain how transition costs will affect its future financial performance, banks may assign a higher risk rating.

(2) Supply Chain and Export Restrictions

For export-driven industries, CBAM and other international carbon measures could affect product competitiveness.

Banks evaluate the following:

Are key customers located in highly regulated markets?
Is there significant market concentration risk?
Are strategies in place for transition or diversification?

If these risks are not incorporated into financial planning, they could affect the stability of the company’s future earnings.

(3) Labor Environment and Governance Stability

Banks are also increasingly focusing on the following:

Employee turnover rates
Stability of key management
History of significant governance disputes

These factors are closely linked to a company’s long-term operational capability. Even if a company discloses labor risks, failure to explain management measures or the financial implications may lead banks to consider the risks as inadequately managed.

Image source: FREEPIK

3. How Companies Should Prepare in Advance for March

(1) Preparing a Risk Disclosure Document

Once financial statements are finalized, companies can simultaneously compile a summary of their ESG risk disclosures, covering the following points:

Key risk areas
Basis for quantification estimates
Response strategies

This document is not a sustainability report but serves as supplementary material to help banks understand the rationale behind the risks.

The key is not to “write a long document,” but to “explain things clearly.”

(2) Building Quantitative Data for Carbon and HR Risks

Even if the figures are not yet precise, companies should establish a basic quantification framework. For example:

The percentage impact of a carbon tax on gross profit margin
The estimated impact of employee turnover on operating costs
The schedule for transition investments

In loan negotiations, a “consistent estimation method” is often more important than “perfect figures from the start.” What banks value is the company’s management capability and traceability.

The fact that data is quantified is more important than having perfect figures.

(3) Strengthening Board Meeting Minutes

Banks also pay close attention to whether risks are being discussed at the board level. Companies must retain the following:

Minutes of risk assessment meetings
Rationale for key decisions
Documentation of the decision-making process

These records help demonstrate that risk management is not an afterthought but an integral part of the governance structure.

For banks, this directly influences their assessment of the company’s “risk management capabilities.

Image source: FREEPIK

4. Support Provided by Certified Public Accountants

(1) Organization of Disclosure Content and Alignment with Financial Information

In practice, the biggest challenge companies face is not whether they are engaging in ESG initiatives, but how to clearly explain their efforts and align them with financial reporting.

For example, if a company is facing risks such as rising carbon costs or supply chain restructuring, it is crucial to ensure that assumptions regarding cost increases, capital expenditures, and revenue fluctuations are reflected in financial forecasts. It is also necessary to verify that disclosure content aligns with notes to the financial statements, management’s discussion and analysis (MD&A), and materials provided to banks.

While this “consistency” may seem minor at first glance, it is a critical point that is rigorously scrutinized during loan negotiations and can easily lead to discrepancies in trust.

(2) Support for Building Risk Estimation Models

While banks do not require companies to calculate every uncertainty down to the decimal point, it is important to have a comprehensible estimation methodology. Accountants can assist companies in establishing a framework for “reasonable estimates.”

For example, using consistent justifications for assumptions, clear calculation criteria, and a traceable data foundation, accountants can translate challenges such as carbon taxes, transition investments, and workforce mobility into a format that allows assessment of their financial impact.

They can also assist in organizing sensitivity analyses. This clarifies the directional impact on EBITDA, cash flow, or capital expenditures should key assumptions change.

While these analyses do not need to be complex, they must be explainable and understandable to the board of directors and banks.

(3) Strengthening the Data Foundation for Negotiations with Banks

The essence of loan negotiations is “using reliable data to reduce the other party’s uncertainty.”

Accountants provide value by organizing data into a structure that banks can easily understand.

This includes clarifying: what the key risks are, the impact pathways, the basis for assumptions, how management measures mitigate risks, and whether formal deliberations and records have been made by the board of directors.

If a company can explain its position using a consistent logic across financial, sustainability, and operational aspects—rather than employing different logics for each—banks will find it easier to reach consensus during risk assessments, credit limit reviews, and negotiations on terms.

The purpose of professional support from accountants is not to make decisions on behalf of the bank, but to enable the company to demonstrate its risk management capabilities in a clear and traceable manner, thereby reducing the likelihood of being assessed conservatively due to insufficient explanation.

5. Conclusion

ABank loan assessments are shifting from a simple analysis of financial ratios to an evaluation of “risk tolerance.” March is a critical period for companies to reassess the mechanisms linking ESG risks and financial performance.

Early preparation is essential for maintaining financial flexibility and credit stability.

To help companies quickly complete internal inspections before the March loan renewal , we developed the “Bank Financing × ESG Risk Negotiation Verification Tool”. Companies can use this tool for a preliminary review and to align the key points of ESG risks and loan negotiations , and then evaluate whether further specialized support is needed.

Download the Tool

➡️ Bank Financing × ESG Risk Negotiation Verification Tool

Is your company ready to meet the new ESG challenges?

Fill out the ESG Financial Diagnostic Form to quickly understand your company's current ESG financial standing and receive tailored recommendations.

Hall Chadwick Taiwan has extensive experience in ESG financial consulting and can assist your company in building a sustainability reporting framework that aligns with the latest regulatory requirements.
If you have any questions regarding the 2025 ESG financial disclosure requirements, feel free to contact us.