OakNorth works with companies seeking to mitigate the impacts of climate change

With more than 80% of business leaders around the world worried about climate change, they need help adapting their business to this new era and opportunities.

Their banks can help with that, said OakNorth chief customer success officer Peter Grant, but they also need to have a good understanding of this new world and the opportunities and challenges it brings.

Peter Grant

They need to know how to quantify, report and act on climate change risks and opportunities in their commercial loan portfolio.

The OakNorth Value Proposition

Grant said OakNorth is well-suited to this new world moving forward, as they already take a progressive, forward-looking approach when assessing borrower risk.

The company itself was created after founders Rishi Khosla and Joel Perlman struggled to secure a business loan in the UK.

The modeling looked at past financial data instead of future business prospects. Instead, they went to New York and fared much better because their lender appraised them with much more progressive methods.

Grant explained that the trick is to break the U.S. economy into several subsectors and take a granular, forward-looking look at the commercial loan portfolio. OakNorth reviews 273 of these sectors.

“It really is the holy grail of commercial lending because it’s so hard to get all the data,” Grant said. “So we set out on a quest to get as many data points on the SME, but also on the analysis of driving time, past expenses and whatever else will affect that particular borrower, associated with the finances of a borrower.”

Combine that with additional components, and you can make an extremely informed loan decision with confidence, allowing you to go into areas you might otherwise avoid, Grant said.

Bringing an institutional approach to commercial lending

Two years ago, OakNorth began selling this approach to other banks and created OakNorth Credit Intelligence.

“Our main differentiation is really in this forward-looking view of the commercial loan portfolio, and we define the commercial loan portfolio as a business that has had $1 million to $100 million in revenue, but also wants to borrow probably from 1 to 100 million dollars. This represents approximately 121,000 loans, which equates to approximately 60,000 borrowers. It is therefore a very good distribution on the American market.

Grant said the amount of data allows OakNorth to see leverage and margins charged across various industries that suggest perceived risk.

“The way we’re able to do that is this granular approach that we have; that we learn from institutional loans that we bring to commercial loans. But more important is the speed and ability to use machines to help humans make decisions. So our value prop is really about lending smarter and faster, learning more using technology and doing it faster to get a decision, an idea, the right decision for the borrower, and then ultimately learning more . And that’s so important right now because we’ve made sure that the credit cycle has changed.

Invests in data analytics

OakNorth invests heavily in analyzing data and identifying new potential data sources, Grant said. They employ 150 credit scientists who specialize in each of these specific sectors.

Hospitality, for example, is divided into six unique areas. This granularity is especially useful for assessing the current state of a restaurant industry that has seen a surge in fast food hiring but a downturn in upscale dining.

“We have around 400 million alternative datasets across all of the company’s historical performance, but we also support live streaming of POS data, we do drive time analysis,” said explained Grant.

“So if you want to open a fast food restaurant in a certain area, we will look at which businesses complement that restaurant, which businesses are in competition, or how will that affect cash flow and revenue. We make a forecast of future cash flows on income based on the data we record. »

The beauty of the model is that banks want their competitors to participate, Grant said, because of the network effect of larger data sets. It brings more detailed regional results that humans use to make a decision faster.

With the last pandemic a century ago, the industry is working without adequate precedent as it adapts to sudden and rapid changes. While lenders perform risk assessments, some engage in manual processes that lead to fragmentation. A risk manager struggles to get an accurate picture of an institution’s entire portfolio.

OakNorth can work with banks to get the full picture in a fraction of the time, Grant said. Both would assign a risk rating to the same files. If there are any discrepancies, these would be the borrowers the institution would contact first. This is better than having to assign hundreds of people just to do annual reviews of thousands of separate loans.

How can banks and their customers deal with climate change?

As banks and their customers adapt to both the pressures and opportunities of a climate-driven economy, there’s a lot of work up front, Grant said.

To provide an accurate rating, rating agencies need a detailed assessment of an institution’s borrowers across a list of considerations, including green assets and investments. OakNorth has been developing such a system for 18 months.

“We have about 18 man-years of research with our credit science and climate science team to produce a framework and scale to assess commercial lending with respect to climate risk,” Grant explained. . “We take about 10 different data points and run different scenarios.”

Part of the preparations include incorporating targets generated by various regulatory pronouncements and international agreements such as the Paris Accords, Grant said, while adding double the amount of investment spent on the PPP program is now required to achieve the targets of the Paris Agreement. .

Based on the reduced emissions from these recent lockdowns, we would need many more like them to meet the Paris targets.

Technology Drives Opportunity

The way to achieve these goals is through technology, Grant said. Green technology is coming faster and heavier than many realize, and with it comes opportunity. That’s a $2 trillion opportunity for the United States by 2030, whereas globally by 2050 it’s $11.1 trillion.

“And what you don’t want is a central bank’s other sources of lending coming in, you want your local banks, your regional banks to come into the SME market space,” Grant said. “So in the United States, 30 million small and medium-sized businesses are our target market for our clients, and they employ 98% of the American workforce.”

Consider a restaurant burger, Grant said. It takes 400 liters of water to bring this pancake to the table. Along the way, its path is affected by ranchers, slaughterhouses, butchers, truckers, cleaners and the restaurant itself, each a business having to adapt to a new world with its myriad pressures from people eating less meat, environmentally conscious employees and other stakeholders considering factors ranging from packaging to recycling.

“So what can banks do?” Grant asked. “First, before, obviously, they’re going to preach to their borrowers, and everyone is getting their own house in order with their own ESG. I think many of them already do. But you have to make it a habit throughout the organization because it’s the people, the process, and then it’s the technology.

Grant said banks need to see their lending exposure clearly at this time. Yes, regulations are coming, but it’s more than that. It’s about building the ready books while doing the right thing.

More lenders are seeing this and participating in a consortium led by OakNorth to discuss how to assess the climate risk associated with loans, especially those that could be traded within a network of institutions, Grant said. This group held several meetings and brought in subject matter experts to discuss sustainability, business development and opportunities.

“If you look at this $11 trillion opportunity over the next 30 years around the world, and the banks are going to be the primary source of funding for this, it makes sense that they come together to agree on the frameworks , is not it?” said Grant. “And how they’re going to fill that funding gap because commercially it’s a good thing. But also, it’s the right thing to do to get back to that compassionate capitalism, their employees want to do it and their stakeholders want them to do it. They are your investors; they are the members of your board of directors; it’s your staff; they are your customers and everyone else. They want to see transparency in your business model and who you fund.