If a bank wants to terminate a loan early, legal barriers sometimes stand in the way of doing so. Does this affect the bank’s climate obligations, or its ability to meet them?

Climate obligations demand banks to engage with clients, helping and urging clients to deliver on their climate duties. If necessary, banks must increase their leverage. Climate obligations require disengagement if clients continue to fail in their climate duties. Or if the bank would otherwise breach its own emission reduction obligations.

These actions do not necessarily imply an early termination of loans. Banks have plenty of opportunities to strengthen their climate engagement with clients and thus reduce the need for disengagement. There are also possibilities for banks to disengage without early termination and strengthen their legal position in case termination is still necessary.

These possibilities include shortening new maturity dates, improving legal terms, making client conversations less open-ended, communicating disengagement as a real escalation option, and not renewing maturing loans. Moreover, banks should consider the knock-on effects of their climate obligations in their legal analyses of termination options.

Hence, legal barriers to terminating loan agreements are not as relevant to banks’ climate liability as is sometimes assumed. These barriers should not discourage banks from taking bold climate action.

Quite the opposite: the sooner banks take climate engagement seriously, the less need they will have to disengage, and the more options they will have if disengagement does prove unavoidable.

You can learn more in a recent article from Pim Heemskerk and Roger Cox in the Dutch Monthly Journal of Property Law (Maandblad voor Vermogensrecht): https://www.bjutijdschriften.nl/tijdschrift/maandbladvermogensrecht/2024/5/MvV_1574-5767_2024_034_005_003 (paywall; Dutch).

The full article in Dutch and a translation in English will be made available on this website once the article is open access.

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