A company is reporting solid results, manageable debt and a strong order book. It approaches its bank for financing to fund a new production line.
At first glance, the case seems relatively straightforward: analyse the financial statements, business outlook, repayment capacity and financing terms.
But what happens when some of the investments that will be needed tomorrow are not yet reflected in the business plan?
This is where transition-related factors can change the analysis.
- A company's current profitability and sound financial indicators are not sufficient for credit analysis; lenders must also assess whether future transition-related capital expenditures could strain cash flows during the loan repayment period.
- Scenario testing around rising energy costs, evolving customer requirements, regulatory changes, and physical climate risks helps banks evaluate the robustness of the assumptions underpinning a borrower's debt repayment capacity.
- European Banking Authority guidelines now require banks to integrate material ESG factors into creditworthiness assessments, and ECB data show that climate-related factors already ease credit standards for companies with credible transition plans while tightening them for high emitters without one.
- Sustainability-Linked Loans, such as the one structured for Eurowag, create a direct link between a company's sustainability performance and its financing costs by adjusting interest rates based on predefined, verifiable targets like greenhouse gas emissions.
- Transition-related factors should not be treated as a separate analysis but integrated into financial assessments, as they can materially alter revenue, cost, Capex, and cash-flow assumptions that determine a company's ability to repay debt over the long term.
1. Assess repayment capacity
Let’s take a fictional industrial company.
It generates €50 million in revenue, maintains a stable operating margin and is looking to borrow €12 million over seven years to expand its production capacity.
Its main financial indicators are sound:
- growing business activity
- stable profitability
- manageable debt
- positive cash position
- strong order book
The lender’s first question is a familiar one: will future cash flows be sufficient to repay the debt?
But these cash flows themselves rely on several assumptions: production costs, energy prices, equipment availability, future investments, customer demand…
This is where the analysis can go further.
2. Factoring future Capex into the financing analysis
Our fictional company is currently seeking €12 million in financing over seven years to expand its production capacity.
During the analysis, another need emerges: the plant uses gas-powered equipment that is currently performing well and fully depreciated. However, a technical study estimates that some of this equipment will need to be replaced or adapted in the coming years to reduce the site’s energy consumption.
Estimated amount: €6 million within four years.
This future expenditure does not affect the company’s current profitability. But it could use up part of its cash resources or require additional financing while the €12 million loan is still being repaid.
The bank therefore faces a very practical question: will the company be able to repay the financing it is seeking today while absorbing the investments required in the years ahead?
The answer will depend in particular on its ability to generate sufficient cash, as well as on how its costs and revenues evolve. This is precisely what the analysis can seek to test.
3. Testing cost and revenue assumptions
Energy accounts for a significant share of production costs, and the company depends on a small number of major industrial customers.
The analysis can therefore consider several scenarios:
- What happens if energy costs increase?
- Could some equipment become more expensive to operate?
- Are major customers increasingly imposing carbon-related requirements on their suppliers?
- Could regulatory changes require additional investment?
- Are sites or assets exposed to physical risks that could disrupt production?
The objective is not to predict the climate or future energy prices precisely.
Rather, it is to test the robustness of the assumptions underpinning debt repayment.
4. Factoring the transition into the business plan
Now imagine that three elements are incorporated into the financial scenario:
- €6 million in Capex to be invested in four years to modernise certain equipment
- a sustained increase in certain production costs
- a customer accounting for 15% of revenue that now requires its main suppliers to follow an emissions-reduction pathway
The company remains profitable, but its financial headroom is lower than in the initial scenario.
The question is therefore no longer simply whether the company can repay its debt based on its current performance, but whether its business model will generate sufficient cash throughout the financing period while absorbing the investments required for its transition.
This approach is now directly reflected in banking practices. The European Banking Authority guidelines require banks to integrate ESG factors that may affect a borrower’s financial performance into their creditworthiness assessment. When material, physical and transition risks may notably feed into the assessment of default risk, internal rating systems or collateral valuation.
5. Can climate risks influence lending decisions?
Data published by the European Central Bank show that this shift is already observable. In its second-quarter 2026 survey of euro area banks, the ECB found that climate-related factors tended to ease credit standards for companies undertaking a credible transition. Conversely, they tended to tighten credit standards for high-emitting companies that had not undertaken a credible transition.
The ECB also found that climate-related investment needs and corporate restructuring have become one of the main drivers of credit demand associated with the transition.
The transition can therefore affect both sides of the financing equation: it creates additional capital needs and can influence how credit risk is assessed.
6. Sustainability-Linked Loans: when the transition becomes part of financing terms
Another option is to incorporate certain objectives directly into the financing structure.
Eurowag, a group specialising in services for the commercial road transport industry, provides a concrete example. In 2023, its €565 million syndicated financing was restructured as a Sustainability-Linked Loan (SLL), a financing arrangement whose terms are linked to the achievement of sustainability objectives.
Unlike financing specifically earmarked for a “green” project, an SLL can be used for the company’s general financing needs. Certain financial terms vary depending on whether predefined sustainability objectives are achieved.
In Eurowag’s case, the interest rate varies according to the company’s performance against several indicators agreed with the banks, including greenhouse gas emissions. The coordinating bank also worked with Eurowag to ensure that the selected targets were material, sufficiently ambitious and verifiable.
The mechanism therefore creates a direct link between sustainability performance and the cost of financing, without replacing the financial analysis or assessment of the company’s repayment capacity.
Key takeaways
Transition → revenues, costs & Capex → cash flow → debt → credit risk → financing terms
Transition-related factors can ultimately feed through to financial decisions:
| What may change | Potential impact on the analysis |
|---|---|
| Future investments | Cash requirements or additional financing needs |
| Production costs | Margins and ability to generate cash |
| Customer requirements | Future revenues and competitiveness |
| Physical risks | Business continuity, costs and asset values |
| Transition pathway | Credit risk assessment |
| Sustainability targets embedded in financing | Financial terms, particularly through an SLL |
The key point: these factors should not be analysed separately from financial data. They can change the revenue, cost, Capex and cash-flow assumptions underpinning the company’s repayment capacity.
7. What should you look at beyond the financial statements?
Financial statements obviously remain at the heart of credit analysis. But when assessing debt over five, seven or ten years, historical data tell only part of the story.
A few questions can complement the analysis:
- What investments will be required over the life of the loan?
- Are production costs heavily dependent on energy, water or certain raw materials?
- Could regulatory, technological or market developments affect the company’s competitiveness?
- Could key customers change their requirements?
- Are assets that are critical to the business exposed to physical risks?
- Does the company have a credible transition pathway to anticipate these developments?
The objective is therefore not to add climate analysis alongside financial analysis. It is to determine whether transition-related factors could affect revenues, costs, future investments and, ultimately, the company’s repayment capacity.
A company can be perfectly profitable today. For anyone financing it over several years, the real question lies elsewhere: what cash flows will it still be able to generate tomorrow?
📌 Finance in practice: when the transition changes the decision
This is the second article in our use-case series, exploring how transition-related factors can concretely influence financial decisions.
Previous episode: Acquisition and climate
Next episode: a company is now in the portfolio. Where should you invest to support its transition?
Frequently Asked Questions
Financial statements reflect past and current performance, but loans typically span five to ten years. Transition-related factors such as future energy costs, regulatory changes, and required equipment upgrades can materially alter the cash-flow assumptions underpinning a company's ability to repay its debt over time.
Transition risks can increase future capital expenditure, raise production costs, and shift customer requirements, all of which reduce a company's financial headroom. Under European Banking Authority guidelines, banks must now integrate material ESG factors—including physical and transition risks—into their credit risk assessment and internal rating systems.
A Sustainability-Linked Loan is a financing arrangement whose terms—typically the interest rate—vary depending on whether the borrower meets predefined sustainability targets, such as greenhouse gas emission reductions. Unlike green bonds earmarked for specific projects, SLLs can fund general corporate needs while creating a direct link between sustainability performance and financing costs.
Yes. According to the European Central Bank's 2026 bank lending survey, climate-related factors tend to ease credit standards for companies undertaking a credible transition, while tightening them for high-emitting companies without a transition plan. Climate-related investment needs have also become a significant driver of corporate credit demand.
Lenders should consider what investments the borrower will need over the loan's life, whether production costs depend heavily on energy or scarce resources, whether customers may impose new sustainability requirements, and whether critical assets face physical climate risks. These factors can directly affect future revenues, costs, and the company's capacity to generate sufficient cash flow for debt repayment.
