NatWest Group plc (NWG) Earnings Call Transcript & Summary

Good afternoon, everybody. Welcome. Thank you for joining our spotlight on Climate today. Good to see everybody. I'm Paul Thwaite. I'm here today with James Close, our Director of Climate Change. The running order for today are relatively simple. I'll start the session by briefly setting the broader strategic context. I'll hand to James. He's is going to cover our climate strategy, the significant progress that we've made to date and our transition plans. I'll then return to talk about what this means for our customers, our growth aspirations, and how we're developing a very much a systems-led approach, focusing specifically on property and energy today. And then James and I will speak for around 30 minutes and then we'll then be joined by Alison, Katie and Lloyd, who is our Head of Residential Mortgages to answer any questions that you may have. So a little bit of context first. It's now over 3 years ago, actually, that we announced our purpose-led strategy in which climate change is one of those 3 key focus areas. So we're 3 years on. We believe then that tackling climate change was and still was a fundamental issue of all time and the banks had a crucial role to play in mobilizing finance to achieve those Net Zero ambitions. NatWest is one of the first banks and one of the largest globally to have climate targets validated by the SBTi, science-based. We also published our initial climate transition plan in February as part of our full year results. More recently, tackling climate change has become an integral part of the bank's growth strategy. In the February annual results, Alison introduced 3 growth levers, delivering personalized solutions across our customers' life cycles, supporting customers' sustainable transitions and embedding our services in our customers' digital lives. So sustainability underpins all of those components of growth. For example, embedding sustainable solutions into both personal and business banking services where there is both strong customer demand, but also high relevance. So the growth opportunity was also further highlighted in the NatWest springboard to sustainability report, which we released last year. The report stated that the U.K. economy could benefit from up to a potential [ GBP 175 billion ] of revenue opportunity for small and medium-sized businesses via the transition, but also create 260,000 jobs and up to 30,000 new businesses. We believe we can help access that wider opportunity by providing a lot more practical support to our business and personal customers to make those necessary changes and investments, more money for green mortgages to our retail customers and more tools and partnerships to rapidly increase retrofitting across the U.K. So we firmly believe that there are attractive risk-adjusted returns to be earned, and we're very much confident our climate ambitions are consistent with providing real opportunity for growth in support of our 14% to 16% medium-term return on tangible equity target. Hopefully, we'll bring more of this strategy to life. But for now, over to you, James.

Thanks, Paul, and good afternoon, everybody. And for those of you who don't know me, I'm James Close. I'm the Head of Climate Change here at NatWest Group. And prior to this, I was Director for Climate Change at the World Bank in Washington, D.C. As you've heard, our ambition at NatWest is to be a leading bank in the U.K. helping to address the climate challenge. We set out our climate strategy in 2020, and last year, I gave shareholders a say on climate by including a climate resolution at our 2022 AGM. That resolution was endorsed by our shareholders with over 92% of votes cast in favor indicating a strong commitment to our strategy. In February 2023, we published our initial Climate Transition Plan, which provides a road map to meet our 2030 ambitions. Focusing on our ambition to halve the climate impact of financing activity by 2030 on our journey towards net zero by 2050. So let me tell you more about our ambition and how we plan to achieve it. Our aim at NatWest Group is to be net zero by 2050 across our financed emissions, our assets under management and our operational value chain. In order to track our progress towards this ambition, we have set interim ambitions for 2030. So taking 2019 as a baseline, by 2030, we have an ambition to at least halve the climate impact of our financing activity to align with the 2015 Paris agreement, reduce the carbon intensity of our assets under management by 50% and to move to 70% of in-scope assets under management to a net zero trajectory; and thirdly, to reduce the emissions of our operational value chain by 50%. We're helping to address the climate challenge in 4 ways, which I'll describe in more detail in the next slide. First, by supporting customers in the transition to net zero. Second, we're helping to end the most harmful activity. Third, we know we can't achieve this by ourselves. And so we are working with others and forging partnerships and collaboration to maximize our impact. And we know we have got to get our own house in order as well. We believe we've made good progress in each of these 4 areas, which I'll illustrate by focusing on some of the points on this slide. I'll start with how we're supporting our customers' transition to net zero. In October 2021, we set a target to provide GBP 100 billion of climate and sustainable funding and financing, but between the 1st of July 2021 and the end of 2025. By the end of 2022, we have contributed GBP 32.6 billion towards that target across our 3 businesses of Retail, Private and Commercial and Institutional Banking. Within this GBP 100 billion target, we also aim to make at least GBP 10 billion of lending available for residential mortgages with an EPC rating of A or B. And our green mortgage product offers a discounted rate to customers who have properties with these ratings. And since the launch in December 2020, we've completed GBP 2.9 billion of green mortgage lending in Retail Banking. And Lloyd Cochrane, who's our Head of mortgages, will be joining us for Q&A, and you can share -- and can share more on this support to our customers. When it comes to ending the most handful activities, we've made commitments on coal, oil and gas and are making progress in those areas. We plan to phase out U.K. coal production, coal-fired generation and coal-related infrastructure by October 2024 and to do this globally by January 2030. As a result, we reduced our exposure to coal from [ GBP 600 million to GBP 300 million ] since 2021. Our oil and gas sector represents just 0.7% of our current lending exposure. We've assessed our oil and gas majors against temperature line credible transition plan. In February, we announced that we will not provide reserve-based lending for new customers, specifically for the purpose of financing oil and gas exploration, extraction and production. And from the end of 2025, we'll not renew refinance or extend existing reserve-based lending. Last month, a Bloomberg New Energy Finance report stated that NatWest tops the ranking of Global Banks underwriting Green Energy. This sends a strong signal that we're committed to ending the most harmful activity while financing the transition. We know that tackling climate change cannot be done alone. So building powerful partnerships is vital. This has to be a team support if we are to move at the pace and scale to ensure that we do the right thing. Remember the Glasgow Financial Alliance for net zero, which is a global coalition of financial institutions, working to implement the transition. We're also a member of the financing a just transition alliance, a program designed to identify the role of the finance can play in connecting action on climate change with inclusive development pathways. We recognize that NatWest could play a role that goes beyond the provision of capital by, for example, connecting homeowners with energy companies and retrofit specialists to make retrofitting easier. Second, kick starting the market for green technologies and services by helping to grow customer demand and also through partnerships like the one coordinated for places for people. This is why Alison has been asked by the Chancellor to co-chair the U.K. government's Energy Efficiency Task Force, which is targeting to reduce the total U.K. final energy demand by 15% by 2030 across domestic, commercial and public buildings and industrial processes. This task force will play a pivotal role to looking at how government policy can galvanize the necessary action by the private sector to meet government targets. Finally, let me give you a few examples of how we're getting our own house in order. Having climate change at the heart of our purpose strategy, we're constantly changing the way we operate as a bank. By 2030, we plan to halve emissions across our operational value chain compared to 2019. To date, we've reduced emissions in our direct own operations by 46% compared with the 2019 baseline. We also include climate targets in senior executive remuneration, so 10% of our Executive Directors annual bonus is based on performance against our climate targets. So let me tell you more about our transition plan. The initial iteration of our climate transition plan is underpinned by 2030 sector-based SBTi validated science-based targets. During 2022, we focused on developing emission intensity transition plans at a sector level, focusing on supporting the transition of customers in key sectors with the most impact on the U.K.'s carbon footprint and our customers' day-to-day lives. We're developing a consolidated view of our current products and services across these sectors and their potential impact on our estimated financed emissions. We're also working to identify future opportunities and capital requirements and business model changes, which are likely to be required to support the transition. This will enable us to increase our lending to customers as they transition, enabling them to become more resilient businesses and seek related opportunities. Given the scale of investment, we expect a growing proportion of our lending to support customers' investments in green and transition technologies and operations. Now let me talk about the sector level targets on the next slide. As I've said, we were the first U.K. bank to have sector level targets validated by SBTi. Overall, we've set transition plans for 72% of our lending book as of December 29, with the balance primarily covered by financial institutions where measurement methodologies are emerging. We prioritize sectors with high emissions and emissions intensities, balance sheet materiality as well as those sectors for which we've already set validated science-based targets. The table on this slide shows the current status for sectors analyzed against external pathways. As you can see from the table, the progress in energy is aligned with the conversions pathways, but other sectors are either amber, which means we're behind trajectory by up to 5%, or red, which is behind by more than 5%. The situation has confirmed that further action is required both by NatWest Group and our customers to meet our plans which in turn, need to be supported by timely and appropriate government policies to create incentives for transition and customer behavior changes. We'll continue to evolve our climate transition plan and identify further products and services to support the U.K., our customer and our transition. Let me now explain how we're adopting a systems thinking approach to decarbonization of the balance sheet. While we have developed our plans on a sector basis, there are linkages between sectors, which support decarbonization across the economy. We recognize the decarbonization of some sectors will have a larger impact than on other sectors. The most obvious example is energy. Decarbonization of energy demand and supply will play an important role in the decarbonization of other sectors, especially mobility and buildings. As another example, supply chain capabilities within the construction sector will influence the speed of retrofitting and decarbonization within the commercial real estate sector. Paul will talk about this more in a moment. Understanding these factors for each sector will allow us to identify opportunities to impact the broader size and direction of carbon flows between sectors. You can see on this slide that there are sectors we consider currently within the systems with a breakdown of our year-end gross lending or assets under management. Mobility, energy, property and food have the most impact on the U.K.'s carbon footprint and our customers' day-to-day lives. This analysis aligned with the U.K.'s commitment in law to be net zero by 2050 has informed our decision to continue to focus on supporting our customers' transitions to a net zero economy as one of our 3 future growth levers. Further work by us, our customers and the government provide an opportunity for us to mobilize our capital towards supporting the transition. Our insights underpinned by a deeper understanding of system carbon flows and customers' current and future carbon emissions also help us to understand and price risk better. But we recognize that achieving our climate ambition and delivering on our climate transition plan is dependent on a number of factors beyond our control, including technology innovation, changes in customer behavior as well as consistent long-term policy commitment from government. This partnership between the public and the private sector is key. I hope that gives you an overview of our strategy and initial climate transition plan. I'll now hand back to Paul to talk in more detail about how we'll put our plan into action in both Property and Energy Systems, the 2 systems on which we've done most work to date. Over to you, Paul.

Thank you, James. So developing expertise and advice on how both sectors and systems are transitioning has been an integral part of the differentiated approach and growth strategy in the commercial and institutional franchise. It's also a very important lens through which we are seeking to manage both our credit risk and our capital allocation to ensure we have both strong and resilient balance sheet. As you -- I'm guessing now, the commercial and institutional franchise supports a very broad range of customers from start-up small businesses all the way through to mid-corporates, large corporates and financial institutions. However, what is common across our customers is the value that they place on the support and practical help that we can provide them with to help tackle climate change. For our larger customers, they value insights, ideas and research; for our smaller customers, they're seeking easy embedded solutions as well as personalized services where they can analyze their own carbon footprint as well as their own financial health to inform actions that they may wish to take. Based on our experience and customer insights over the last few years, I'd say we know the following things. Firstly, businesses are putting climate higher on their list of priorities. Secondly, rising energy prices and volatility in those prices has improved returns on some key transition projects. Thirdly, there's greater awareness across the supply chains of carbon footprints and necessary transition plans. Fourthly, more customers believe their banks have a role to play in supporting them in that transition. And finally, the key barriers most often cited our time, know-how and financing. So based on those 5 insights, we very much focus our work with customers and clients on helping to raise awareness, to educate, to give them very practical tools to understand and measure their current carbon footprint, but also to identify opportunities to reduce their emissions. This is all underpinned by our deep sector product and local regional expertise and also, as James alluded to, powerful partnerships and collaboration. By way of example, we've teamed up with carbon footprint experts CoGo to help our retail customers estimate the emissions associated with their spending and find ideas to reduce them. Last year over 330,000 retail customers used the carbon tracker in the mobile app, which is a U.K. banking first. As a result, customers can take action to lower the carbon footprint, but -- whether it be by composting food waste, reducing meat consumption, travel patterns or secondhand clothes. But more broadly, this is driving deeper customer engagement through the mobile app. We've also built Carbon Planner, a very neat online portal that helps SME's measure and develop their transition plans and how to decarbonize their footprint, including the ability to access financing. We're also working with partners such as the Sustainable Food Trust, the sustainable market initiative and U.K. finance on why the systemic changes needed to transform the food sector and a digitized tool to measure environmental outcomes for farmers through the global farm metric. Ultimately, NatWest role is to help unlock the opportunity for our customers, which in turn leads to growth and opportunities for ourselves. However, to meet the global target set out under the 2015 Paris agreement, there is a shift in mindset towards what can practically be done, and that is critical, helping businesses and consumers on this journey by providing financing and tools such as CoGo and Carbon Planner, I've just talked to, are 2 simple but positive examples of this already in action. Now let me touch on a very important area of how we are embedding climate into our decision-making. It's critical and hopefully self-evident, the climate risk has to be fully integrated into our decision making. In addition to supporting our customs transition, it also helps to ensure we build a resilient balance sheet, but also unlock the value that our shareholders want and expect. Over the last few years, we've been building climate considerations into our existing decision-making framework, be the capital, credit or pricing to make sure that they take account for climate-related risks and to enable us to manage our capital allocation accordingly, ensuring informed risk reward decisions. We're doing this by using and developing tools both for portfolio and customer level. Hopefully, you can see this on the slide. At a portfolio level, we've introduced an increasingly quantitative methodology to identify and assess sectors and subsectors to heighten -- expose to heightened climate-related risk. Quantitative climate scenario modeling that has provided insights on the impact of climate-related transition risk. Dropping from the portfolio risk to a customer level, our priority is very much to support customers in their transition journey ensuring solutions and options are tailored and adaptive to their needs. For our larger corporates, the launch of initial qualitative climate risk score cards allows us to build a deeper level of understanding about our customers' exposure to climate-related risks and also to the opportunities that support them. For SME's, the development and provision of tools like Carbon Planner enable us to more effectively understand our customers' carbon footprint and transition journey, which can help identify climate-related opportunities. It also enables us to develop and offer more personalized business-specific solutions. For our retail customers, it's about helping customers estimate the emissions associated with their spending and homes and vehicles and find ideas to reduce them. We're also working diligently on an internal carbon pricing framework. All of this insight brought together will help us to embed climate within our decision-making frameworks and tools, which will allow us to significantly improve our risk management and the pricing of that risk and opportunity. This will further support our wider growth ambition helping to support the 14% to 16% medium-term return on tangible equity target. James introduced our systems led or systems thinking approach. Let's now share an update on properties that brings to life. The U.K. government targets a 15% cut in U.K. final energy demand by 2030. This presents a significant commercial opportunity to help decarbonize the U.K. property system, a role where NatWest scale and influence enables us to support the development of a more integrated but also more effective supply chain. Achieving this target will require a maturing and scaling of the supply chain between customers, construction and installation services, technologies and finance. For example, focusing on housing associations to decarbonize their properties provides a large and concentrated demand. We estimate the housing associations would need to borrow in the region of GBP 36 billion to successfully decarbonize, providing a clear demand signal for property retrofits. This will mobilize the construction industry and the installers to invest in developing the skills and again providing the potential to support 350,000 new skilled jobs. Focused on our SME's will create growth opportunities. I mentioned the Springboard's recovery report earlier, this estimates the revenue opportunity for SME's alone for retrofitting residential homes and installing heat pumps in residential and commercial property to be between GBP 100 billion, GBP 120 billion through to 2030. However, as we all know, the property system is complex, it's highly fragmented in some cases, but it's one in which NatWest position means that we are both the scale and the influence across the value chain to play a critical role in supporting the transformation of that property system. Let's look at this a little more closely on Slide 14. Beyond the very obvious provision of capital, NatWest can connect homeowners with energy companies, retrofit specialists to remove those points of friction for retrofitting buildings. We can achieve this in 3 main ways: firstly, by supporting the supply chain, we're exploring with the supply chain sustainability skill, how to build the skills needed to retrofit homes across the whole of the U.K. We're also working on how to provide financing to support suppliers and customers switch to low-carbon materials and technologies. Secondly, kickstarting the market for green technologies, materials and services requires at scale customer demand. Recognizing the scale and urgency of the climate challenge, we've partnered with places for people which is Gas Centrica and Schneider Electric to work together on significantly sized pilot project to show that retrofitting homes at scale is not only achievable, but also on an affordable goal. We look forward to learning from this pilot and collectively rolling out and delivering solutions at scale to support customers in improving their property efficiency. Lastly, an end-to-end retrofit solution for property owners to connect to our business customers. We're creating a One Stop Portal where customers will be able to work out what they need to improve the efficiency of their home, find the finance and source a supplier. We must make it as easy and as cost-effective as possible to encourage people to take the leap whilst also recognizing the economic challenges for households currently, but also the diversity of the housing stock. This will truly help us in deploying our mortgage products, including providing at least GBP 10 billion in lending related to residential properties with an EPC A or B rating from the 1st of January to the end of December 2025. We think we can achieve a competitive advantage by putting ourselves at the heart of the U.K. property system transformation One Stop Portal, strategic partnerships, personalized customer recommendations and green mortgages will embed us within our commercial and residential customers' finances. Turning to the energy system. We know the energy system has to transform to support decarbonization of other systems, existing renewable technologies will continue to scale up and new technologies will emerge. We've built a long-standing and market-leading #1 U.K. renewables business through understanding the commercial opportunities that are driven by changes in government policy and by building a deep relationship with customers such as SSE and Scottish Power, but also other energy providers in the U.K. and Europe. We believe we can replicate this capability in other areas to take advantage of the requirements that are the -- to mobilize [indiscernible] of capital. Our work on systems transformation, gives us insight into the actors, the participants, the financing structures required to support the transition. We'll also need to work with partners such as U.K. infrastructure bank to derisk, but also to mobilize that capital. These opportunity is to develop new proposals across the energy system respond to already announced government policy with energy security strategy, EV charging plans and hydrogen economy financing all being potential avenues for exploration. We are well positioned for our local, regional and specialized sector coverage from where many of these projects and investments will originate. We're currently working through the opportunities across the system, and we look forward to updating you on our specific plans in this area. So in conclusion, let me summarize the key messages we shared today. Firstly, we were early to announce climate as a key focus area of our strategy back in 2020, and sustainable transitions have become an increasingly an integral part of our bank's growth strategy. Secondly, we are one of the first U.K. banks to have climate targets validated by the SBTi, science-based and recently published our initial climate transition plan. Our scale, our market position, our sector coverage and our thought leadership is allowing us to create partnerships across stakeholder groups and to innovate and pilot new practical solutions as hopefully demonstrated by the examples today. Thirdly, our focus on climate is not only the right thing to do, but it's also at the heart and fundamental to our growth strategy. By focusing on climate, we're able to embed sustainable solutions into ever more personalized banking services, forming the foundation for future sustainable returns. And we are doing this in ways that ensure we build a resilient balance sheet that unlocks the value that our shareholders want. Fourthly, we'll continue to support our customers' transition by providing financing, including the GBP 100 billion climate sustainable funding and financing target by December '25, creating better and more digital tools on how customers can reduce their footprint, but also by partnering with others to help them grow. We believe this presents a very real, a very compelling opportunity for commercial growth, achievable through the leadership position that we've established over the last 3 years, and our commitment to unlocking long-term sustainable value. Thank you for listening. I hope you have a clearer understanding of our climate and sustainability strategy. And now I'd like to invite Alison, Katie, Lloyd and James back to the stage, and we're happy to take questions. Thank you. And Alexander will compare, I should have said.

Thank you, Paul, and thank you, James. I'm Holcroft, and I head up the IR effort for the group. And as you said, we'll hold an IR session now. [Operator Instructions] So let's start session, Alastair, please.

It's Alastair on from Bank of America. So, I guess, 3, please. First, have you seen a shift in customer demand following the spike in energy prices last year, or was that a spike that went away and you said basically did everybody ask about green financing when gas was dear and now gas is cheap again, they've move down or was it structural change. And second, when you think about lending, how do you use the carbon price? Because the Bank of England, if ever saying it's going to be GBP 1,000, most reasonable estimates that it's going to be GBP 300 or GBP 400 or GBP 500 in order to facilitate the transition, but it's still only GBP 80. So do you use the big numbers where we should be going? Or are you actually -- you're constrained to using the numbers that are actually experienced at present. And the last piece really is just timing. Are you really aiming at net zero by 2050 because if you're doing half by 2030, it sounds like you're trying to get it before 2050. And is that a business choice rather than a sort of society choice because 2050 is the goal. It feels like you're moving rather more quickly than that.

That's combination of I think Alastair, Jason, Paul for that question, please.

So should I just have a crack at the third and the first, and then Paul and James can fill in. So its -- I think as you heard Paul talk about, we see the climate transition as a real business opportunity. So we think there is a core part of our growth lever. We see real demand. I think the change in demand is almost a change in tone. So whilst there is increasing demand as people really care about sustainability and they wanted to make the transition, and we can see that through some of the research that we have with households and businesses. Actually, with the energy crisis, it's been about energy security and price. So the case for sustainability at an individual consumer and business level has become different, but very real. And what we've really focused on and that aligns very clearly with the strategy and the tools that we've put in place is translating 1.5 degrees into what do I do as an individual business owner or what do I do as a household. That's where the investment we're making in practical tools, Carbon Planner, CoGo, all of the different elements really help put the information in the hands of the customer. So -- and so on the timing point of net zero, and if we can get there faster, we will. We've been very clear there are dependencies on government policy. This is definitely something that needs public-private partnership. But in terms of demand, we see a real business opportunity. And our research shows that there's GBP 175 billion revenue opportunity for our customers, SMEs by being part of the transition. So our role as a leading bank for SME is to help facilitate, that is a real opportunity for us and for them, which is why we're very practical as well as very strategic.

Shall I pick up the question on the carbon price, which I'm delighted to hear, I have to say. And we could have of a long conversation about what the right carbon price is. When we were at the World Bank, we were working with Joe Stern -- Lord Stern and Joseph Stiglitz on The Stern-Stiglitz Commission, which had about $100 a tonne as a societal cost of carbon. But, I think, the point is that we will actually do this incrementally over time. We'll start off with a shadow carbon price, so that we can learn what the impact will have across our portfolio. And we'll apply it across industries more that are more carbon-intensive and then the relative carbon intensity of a business within that industry. And we think that's the dynamics that will enable us to build in that shallow price of capital alongside the shadow price of carbon. Once we're also confident that we can make that work for our balance sheet and for our risk-adjusted pricing adjusted, then we'll roll that out and make sure that it sits across the portfolio in an appropriate way.

I think James one thing I would just add to that as well, is it's something we use actively today as part of our internal capital assessments, when you're trying to test different scenarios to actually say what would happen, if the price was more extreme than you suggested or less so and actually that we've done. So we're doing shadow in terms of pricing, but it's also really used very actively as part of our stress testing as well.

One thing I'd add is that the carbon pricing will be one aspect of kind of broader customer decisioning. So you'll have individual kind of customer transition plan assessments, have quantitative score cards, then you'll factor carbon pricing and that will allow you to get a really good view on the risk award, and the underlying climate risk. So it's part of a broader approach to making sure we're pricing appropriately. On the demand point, I think , Alison has covered it, Alastair, in path where I would say there was already demand before the spike in energy prices. I think the spike only served to, I guess, increase the awareness and the demand. And I'd say that's been sustained afterwards. I think that the awareness and the consciousness is now there. So we see an elevated level of interest both in terms of understanding, but also in taking action as well.

Jason?

Jason Napier From UBS. Two, please. The first one on the GBP 100 billion lending target. It's also taking into account presumably bond finance refinancing during that period and so on. So I really don't know how to think about how much on balance sheet change we are to expect over the period of time. So let me talk a little bit about what, if anything, this means for changes to the shape of the balance sheet? And then secondly, the commentary that you've shared on the use of the methods on capital allocation and so on, is it? If you could just talk a little bit more about that, please, whether that is about stress test outcomes, and how you actually divvy up that capital on that basis, please?

Alison, can we start with you and then may be Paul then maybe Katie on that.

So, I think I'll get Katie to answer the GBP 100 billion lending target to give...

Yes, absolutely. So as you look at the number, we've done GBP 32.6 billion already and you're absolutely right, it's the blend of on balance sheet as well as the financing and bond issuance piece, a little bit slightly more to the financing side, but you can see the target we've got around the GBP 10 billion of mortgages, that's clearly all balance sheet. And we've growing numbers as well within [ pulse ] basis. I think that's really important that it is about the change in the balance sheet shape. What you can also just see in the way that we present our information to you, you'll see as you look at our loan book, it's more of the further back part of the accounts that actually we give you all the risks and the sectors that will be most impacted by. And one of the things is to watch is how that goes -- how that moves through. And then again, in the Climate transition plan, there's the lovely little graphs, actually shows where are we against those different aspects. And to reach what we need to do, what we need to see is that you have a really good blend across both the financing and the funding aspects of the GBP 100 billion target. So we definitely are seeing our balance sheet changing in terms of that. And Having set those SBTi targets for 72%, that means you have a really important kind of you're being held to [ real account ] in terms of what you are doing. As Alison said earlier, we won't do it alone, there will the policy change. But actually we can see that we got the right mechanism in place that we're able to really track it and really offer the right product [ debt ] to customers.

Next question, Justin.

Justin Bisseker from Schroders. I think it's probably a question for James. The -- I think you're probably one of the very, very few banks in the world to get SBTi validation of targets, pretty much every bank I speak to is saying it's almost impossible to do. What would your advice to them be? How come NatWest has done it when others are struggling? And do you think the way in which you've done it is making the bank better in the long run? Or are there certain compromises that you had to make to get the validation so quickly?

Well, I think -- thank you, Justin. I mean, I think the answer to the question is just have a great team who can work through the detail of all this...

Person like James, that's what you are saying.

No, I mean, it's been a phenomenal effort. It's been a combination of finance and the franchises to really roll their sleeves up and get under the detail of the numbers around this. And our colleagues in data and analytics that have had to work really hard to get the right kind of data proxies as well. So it is extremely time-consuming. It's a major endeavor. But I think it's given us a real insight into what our balance sheet looks like today and what it needs to look like in the future. And I think that's what we're really here to talk about is how we can use that insight in a way that will create long-term value for us. I haven't seen in the very short term, immediate negative trade-offs here. We've obviously made decisions around oil and gas that you heard me talk about earlier. But I think it's sharpened our focus on the areas where we can help our customers most effectively. And we've just spoken to [indiscernible] beforehand that we'll make it a little bit easier for other banks to do it because the engagement with SBTi was quite challenging because they're doing it for the first time as well. So we hope others will follow because it's really important we get real rigor around our collective approaches here.

Maybe just to add on the compromises. I guess, is leading the franchise, which is accountable for, I think, 59% of the capital. It doesn't feel from a business strategy perspective that, that's involved any serious trade-offs or consequences. So very comfortable with both the process and the outcomes.

[Operator Instructions] John [indiscernible] to Justin's point in SBTi, it's really welcome. One thing that SBTi do not do is monitor the progress that you've made and you put up a slide earlier on which showed the progress against the individual sectors. Is that what we should expect to see every year? And then secondly, would that be -- would they be audited numbers? Because, again, you're setting an example for the banks to follow, you can raise the standard, a little bit squeeze on there in terms of what to expect.

Yes, so you'll definitely see it every year. I mean in terms of this was our second year of publishing a climate document, last year it was TCFD. We've now moved to Climate transition plan, we'll do annual updates on that. And our graphs, you'll see our dots move in terms of how we go there. It's interesting in terms of audit. You'll be aware of the SEC's expectations that will actually start in '24, I think it's greater in '25, '26. We'll see if that actually is what comes out from the states, but I do think we have a growing involvement of the auditors in terms of what we have. Those are not audited numbers. I wouldn't say that I will give into trouble. There's a lot of dialogue internally in terms of that piece. And I think when it's appropriate and certainly, we would do it importantly in terms of the expectation that we would get to that point, I'd be very comfortable. We're certainly building all of our modules so that they comply with all of the SOX, COSO kind of time frame works that you have so that they are highly auditable when it comes to point because that's important for us as a management team that the we can really place great reliance on that. So I'm sure in time we'll get there. I will give you a date, but it's certainly the way [indiscernible] is heading. And I do think for me, if I look at our financial documents and the documents that Alison and I presented earlier, the presentation of that carbon number is as important as the presentation of the financial number. We want to know that they're as robust as each other. So you'll just -- you'll continue to see that evolve in terms of policy as the data improves, as the understanding improves as we move forward.

Yes. I mean, I think, hopefully, it gives you confidence where you can see what we're doing is our climate transition, it is a transition. We are very serious about it. It is something that we're running at a business level, and we're trying to give you as much transparency as we possibly can. I've always been very clear on our strategy. This is not going to be a linear path. We will need policy improvements and we will get better data as time goes on. But what was really important is we started and then we're giving you a clear transparency on our progress.

[ Andy Risk, abrdn ]. Two questions, please. You mentioned on the slide the leading capabilities into the capital markets, sustainable finance. I wondered if you can sort of elaborate a bit on that if you see particular areas of strength essentially where NatWest wins in this space or maybe what you've done to date that sort of has helped with that? And then secondly, may be just a different topic, the -- one of the key levers you mentioned sort of embedding ourselves in customers' digital lives. And I think maybe one of the examples around that, is that sort of linking somebody trying not to install a heat pump to the supplier to the [ connectors ]. I guess, how you would sort of see this for the future vision for NatWest is something that's actually all these adjacencies, which are -- there's a long way away from essentially issuing some on a mortgage, and it sounds a lot more likely kind of a digital bank that puts a lot of all the boring stuff in the background like paying your bills and puts the more interesting things or helpful solutions in the front. I don't know if that's -- if you can elaborate on that, that would be helpful.

Paul, should we start on first one.

Yes, I'll take the first one. So I think we're very early to -- if not the first, one of the first to establish some dedicated teams around kind of ESG and climate financing advisory in our capital markets team. I think when you look at the different geographic marketplaces, I think the U.K. led in some of those areas, and I think NatWest was at the forefront of that. So we built the teams out over a number of years. I think what -- that's given them is, I guess, given us and those teams the ability to differentiate our advice relative to our peers, both here in the U.K., but also in Europe. You can see we've got some of the numbers in the slides, but also the numbers we've disclosed more broadly around I think GBP 41 billion of issued capital markets. So that's to me the evidence that over a number of years we've advised and partnered with clients to take them through to the capital market. So I think it's about getting early, but also then gaining the insights and differentiating our position. So that's how we've established that. And we continue to invest in that area as well. It's an important area of growth for us. That's the first piece on property.

Well, I'd just add as well. I mean, we are one of the leading banks in renewable financing by a number of transactions and have -- that's been a track record we've been building over a decade. So we have a real leadership position in renewables. Obviously, with our sort of relationships and ecosystem, that's really where we're starting to leverage and think in partnership. You heard the team talk about the systems-based approach. But we've got to get the demand supply signals working really well, and that's really how we're doing it, but, James, you can talk about some examples.

Yes. So I think to your question about whether we want to be more integrated further up from just the boring mortgage, they were your words, they look similar. Yes, is a short answer. I think all of the work we've done individually and with partners to this point about the property system, tells us with the retrofit of U.K. homes, which is a huge undertaking a big investment opportunity for SMEs as much as it's a necessity for home owners, it's complex. And so providing the funding is necessary, but it's not enough. We need to provide customers with information, grow their awareness, grow their understanding, ensure that we're incentivizing them to take those opportunities, but do that with select partners so that the process is easy. Today, the process, if you decide you want to make an energy efficiency improvement and reduce your bills, an outcome of that is reduced emissions from our perspective, but that's typically not the homeowners' motivation. It's a very confusing, complex process. And so that there are fewer incentives to do it. So yes, we want to have conversation about the one-stop shop. We want to work with selected partners to use the data we have, combine that with data that others have and make that process much easier than it is, which unlocks a growth opportunity over the medium-to-long term, we believe.

Lisa Kladitis, JPMorgan Asset Management. On capital markets activities, we welcome the inclusion of facilitated emissions in your recent report. Because this is quite new area, could you maybe speak to some of the challenges in reporting this and what are your plans are going forward? Is it going to be included in targets or -- and I think our question is about aggregating that, but just your views on this stuff would be appreciated.

Yes. So I think the first challenge, of course, is to get some decent quality data around it. I think the -- and we're obviously looking primarily at a sector level. And ultimately, we want to understand from accounts policy level. So there's a whole journey to go from where we are to where we need to be. I think it will be facilitated by standardization as well. I mean I think that is a really important trajectory that we're going to see from IASB and from others trying to converge around that standardized approach. I think -- so we have built elements of our transitions through those individual sectors into our targets within the business. And I think that is driving us to get better quality information and also to work out where to prioritize our actions to help us drive that emissions and deliver the targets there. I think it's just going to be more integrated into everything that we do over time. And I think that's where we've got a good head start, and I think we're starting to see, certainly the conversations I had with my peers, that they're following in some of these areas as well.

SI I think, James, we take disclosure very seriously. So we don't start to disclose something casually. And we do think our disclosures in this area is going to evolve far more than you would have seen in other areas because the whole understanding is evolving. But having started to look at something, we'll continue to evolve it, and we'll highlight when it's changed and why and the methodology and things like that, but it something will only continue to improve over time.

In other words just the final point, I think, it's the PCAF scores is something that's got quite a lot of attention. And we put in place plans to improve those PCAF scores over time as well.

[indiscernible] from Jupiter Asset Management. I've got 2 thematic questions. The first one is about awareness amongst the relationship managers, given much of your business actually happens through them. And the second is related to customer behavior in light of the current market. So, I guess, the first, I'd just be interested to understand to what degree and extent is there good awareness within your relationship managers in terms of implementing the right target and goals you've set out in your transition plan? And secondly, just looking at the 3 market environments we've just seen right, on one hand you've got interest rate hikes, on the other hand, you've got never ending increasing energy prices. But on the third side, you've also got government intervention in trying to control what these energy bills are. Now with all these 3 factors, how do you see yourselves meeting your own 2025 and 2030 commitments? Do you see customers don't quite want any more energy efficiency improvements because how about let's just delay the action when some day interest rates are back down, and we're back in the real-world environment. I just want to know how you're thinking about the risk scenario against your own 2030 commitment?

I'll take the first one on.

Yes, I'll take second one.

On relationship management. So over a number of years, we've invested quite a lot of time and quite a lot of money around education, not just the frontline bankers, but also the teams that support them. We've got a 3-year partnership with University of Edinburgh. We're taking our senior leaders through the Cambridge Sustainability School. So really, I guess, starting from basic principles around the science, the impacts on the economy, the impacts on society and then linking that to the financial sector. So we've had that running for quite a while. In terms of their visibility on the targets, the transition plans, the reality is every banker wherever they are in the U.K., has good line of sight around scorecards that they use with their customers around transition, how to assess the climate risk within their embedded customers. And they're totally, I guess, socialized to the goals which we have as a group. So to me because it's at the heart of our strategy because we see it as a growth opportunity. I'm sure -- and you can test yourself, if you go out and speak to relationship managers, it's very much front of mind around the understanding of it, but also how they can support and help customers.

Yes. I mean I'll just reiterate that. I mean, we talk about climate a strategic imperative. And in my -- in our results this year, we talked about the growth levers for the future of which sustainable financing is a core growth strategy. And so that's embedded in our scorecards, in our remuneration and real visibility. Actually the training that has gone on across the bank has been actually a real pull factor from our colleagues as well. So it really is strategic. It's not a CSR projects. It's really the nuts and bolts. Your second question on the kind of macro environment and what impact that has. I think about it in 2 ways for -- at an individual and a business level, climate transition and sustainable businesses and sustainability are important to our customers. The gap that historically has been there has been bridging between really care about what's happening, how do we practically make a difference at an individual level as a business owner or as a consumer. And we know that from when we launched our partnership with CoGo, which is a fintech that we put into our app when we ran the pilot, we could see just by giving information into the hands of our customers, they made every day small changes to reduce their carbon footprint. From a business owner perspective, the report that we did last year called Banking on a Sustainable Recovery that was GBP 175 billion identified. I think if you put in front of business owner as a real revenue opportunity and business growth opportunity, it makes sense. The big gap has been how. And that's why we're really focused on practical steps and tools, Carbon Planner, cheaper financing to really help get the reward side. So I think it's I think the business opportunity and the imperative for customers. I think the rise in energy prices has brought in real sharp focus to people, the cost of energy. And I think energy security has become a much stronger motivation, particularly for business owners. I think the cost of energy and how vulnerable we are is very much in the consciousness. So that kind of augments what is already a desire there to do something about it. I think like any new horizon when you're moving on to something, first-mover advantage is really important. So I think even in our research, your housing research that we did, a year ago 50% of our consumers or customers when they were surveyed about whether they would retrofit the house, whether they were interested in it, a year ago, it was 50%. But when we did last year, had gone up to 68%. Our most recent had dropped to 66%. So we've got to bridge the gap and close the green premium, but I think the energy prices just emphasized how vulnerable you are to energy prices and brought an extra dimension into -- it's not just about addressing climate, it has practical implications as well.

If we can go to Zoom, we have a question from Aman Rakkar at Barclays.

Two questions. One, really interested around your -- the idea that you're embedding climate-related risk into your capital allocation, which, I guess, you're imposing your own kind of capital requirements upon your business related to the -- your assessment of climate risk, which is kind of incongruous to some of the messaging you get from regulator, the Bank of England's stress test, they're at pains to tell you that they don't see climate capital requirements is an effective way to kind of finance the transition. So I was interested for your kind of high-level thoughts on what's the medium-term outlook for climate stress testing at an industry level? Do you think we ultimately do land to a place where you're getting climate-related capital requirements posed upon banks because you actually suggest perhaps you are kind of preparing for that either deliberately or not? And the second question was on your mortgage portfolio, your housing stock. Interested in your view around the 20% or so of your housing stock within energy, PC rating, ESG, which may never actually get to a EPC rating have seen above, given it's an old legacy stock. What's the long-term outlook for that stuff. Is that simply a case of the U.K. government being part of some subsidized solution? Are you part of that solution? And isn't that some kind of fairly material or latent risk for your capital value?

Great. Thank you. Katie, can you start on capital and risk for the first one.

Yes, absolutely. So I mean it's investing on the position in the regulators. If I look at it, what we can see it comes into our Pillar 3 disclosure. So it's very much around the disclosure aspect that we have to do today. What we know and what history would tell us is it generally works this way to the left at that point in terms of that. So -- and I think I've had the pleasure of spending a lot of time with different very senior kind of regulators both here and Europe, and what they would say when you're lecturing to a younger group or post-graduate students, they would be horrified that it wasn't in your capital already in terms of that piece. I think it's a transitionary point. The idea, Aman, of bringing into our stress testing, we even spoken about it in the year-end around IFRS-9 that we had started to work is how we bring into IFRS-9. The impact on it in the shorter date is relatively small, in reality on that, but it's the reality of the world that we live in. And when we set our macroeconomic assumptions, we need to set them for the world that we live in. And the reality is that climate change is beginning to impact those assumptions in terms of where we go. Muted responses in the first number of years where you saw from the PRA and the beds that they published, as you go into a multiyear basis, the impacts become much greater in terms of that. So I think it would be inappropriate for us not to be considering it fully as part of that stress test, whether it's around differences in capital charges and what actually happens to some of the growth rates. And that you just test it, play with it, and see what you kind of come with as you go through. So for me, its absolutely the right thing. I have a personal view. It will come into our capital charge and time, won't be this year, next year or maybe the year after that, but I think as we sit here in years to come, it will be something will come there because there will be real risk and a narrative within the economic -- macroeconomic factor. So therefore, we'll have to kind of -- it will have to roll through. So we're comfortable to start that journey now and really reflect what the realities that we see to today. Mortgages?

On the properties [indiscernible], I think there's a number of points to make on that. That's one example of the complexity of the housing stock in the U.K. Another example of the complexity would be in the income levels of customers living in homes any EPC rating. As I mentioned earlier that the transition of the housing stock is a public and the private exercise, but there's also an element in some of the regulation that we see already. There's an element where -- there's an acknowledgment that some properties have -- or all properties got natural ceiling, they can't improve above a certain level. And also there is a place which you wouldn't spend the next pound to achieve perfection and the buy-to-let regulations that are out at the moment are putting a cap on the amount of spending to get above a certain EPC level. So I think there is a degree of practicality that is required when thinking about properties of low income bands, and that degree of practicality alongside our role as a private organization and the government's role directly supporting homeowners, but also supporting the market with signals means that there is a risk of legacy in some of our asset books, but it's not as stark legacy, as I think you will may be considering.

You could come over here, please.

Sophie Demare from Federated Hermes. It's been great to hear about your work with clients on coming up with transition plans, and this might be slightly a pessimistic question. But thinking a few years down the line, if you start to see clients not delivering on those transition plans. Can you talk a bit more about what would happen in that situation? And any kind of sustainability linked to contractual elements being considered for that?

Well, I mean I think -- I mean, Paul, can talk about it. We have -- we've been very clear with those hard-to-abate sectors and what we call the harmful sectors that we want a credible transition plan aligned with Paris to the extent that we don't have a credible transition plan, you can see that we have exited exposure . So it really is about working in partnership with our customers. As we've talked about, there are going to be some sectors which are really hard to abate, great -- often quite the agriculture sector. It's a small part of our lending, but a big part of our emissions. We're not going to stop lending to the agriculture sector. Our job is to work with customers and come up with credible plans. And also each sector is not going to move at the same level or be able to achieve zero. It's about the absolute of amount of emissions. So we have very open, transparent conversations about credible transition plans, providing we can see progress and there's good momentum, but you can also see that we also exit exposure if we don't think it works. I think what's really important is our strategy is to work with our customers. What you don't want to see is hard-to-abate sectors if they are making progress being removed from the public markets and transparency and visibility because the ultimate game is to get the emissions out of the atmosphere. That's what we're all aiming to do. So we're very clear and very transparent about that.

I think Alison, in terms of will you do any kind of ratcheting in terms of the sustainable -- the price of the loans, we already see already there's incentivization in some of our loans out there. And I'm sorry, I'm trying to remember the number of how many there are, but it's relatively significant already in terms of how we actually build that in already. So as you hit certain parameters, then actually, you could see some benefit...

Yes, we have a book of sustainability-linked loans, where there are ratchets already depending upon the progress or lack of progress that underlying clients would make. It's an effect. It does bite if there isn't the progress that has been committed to.

Today, the government published its Green Finance Plan, which will look at the time scale over which transition plans will become compliant, expire versus mandatory. So I do feel there's a sense of direction here that there's going to be perhaps more optimistic than the view that you've implied.

Yes, I think we're in the optimistic -- practical and optimistic.

[Indiscernible] from Allianz Global Investors. Maybe just following on the point transition plans, if you can and to the extent that you can, could you maybe provide more information around how you actually assess the credibility of transition plan. I mean, this is I think, a challenge, a lot of investors are facing in a different context. And also do you think this could be a source of competitive advantage given you have a number of peers also moving in this direction, thinking about that? So is there something there which maybe if done better, there's opportunity for that as well.

I can start that. Well, I think we learned a lot from the work that we did with the coal and the oil and gas sector, where we abide temperature alignment principles to give us views on the credibility of transition plans. Now, we're not going to do that for every single customer, but the principles I think apply quite well and enable us to think about the starting point from an emissions perspective as well as the direction of travel and enable us to evaluate this over a period of time. And I do think it is a sort of a comparative advantage because we will understand our customers better. We will also have a better way of pricing risk as we talked about before. And we'll be able to anticipate the impact of policy on different market segments and individual customers within those sectors.

Just like to go back to mortgages. The green mortgage, you have offers an award -- reward for somebody who's bought an already highly rated house. Can you see -- and I can -- I mean we all know the challenges, but can you see mortgages developing where there's a reward for improving houses if there's an economic justification for your book to make that actually real, if you like?

Again, short answer, yes. I think the green mortgage, the A and B discount is a useful price signal which is used for encouragement to customers to move the properties themselves, the bigger opportunity from a growth perspective and the bigger need from a consumer perspective as you said, to fund those retrofits. I spoke earlier about the need to inform customers and give them a tool to make that process simpler. There's also the need to incentivize that. And so yes, I think the bigger longer-term funding tool for us in the residential mortgage base is retrofit funding, and we're aiming to have something like by the end of this year that we'll do that for customers links to because it's not just funding links to the platform that makes the process much easier than it is today.

It's Sabahat Salahuddin from BlackRock. Thank you for the very detailed insight for presentation. I think for me, 2 questions. The first is there's obviously a lot of work that has happened and I am keen to understand what is coming up next to what you look forward for in 2023 and your main focus areas. And secondly, just thinking of all the work that you've done with PCAF and the data, I mean, there's still challenges on data and the quality. Do you see the actual kind of estimate that you've done evolving as data improves? And what kind of margins are you thinking that these would move in, in the future?

Well, you can do PCAF, it's your favorite topic. Look, lots coming up. I mean we're very -- hopefully, what you can see from the plan is we're giving you real transparency because our ambition on the climate transition plan and also the areas in which are within our control and where we will need policy help. We're very active in working with government to help find the answers. But as Lloyd mentioned, what you'll see, and I talked a little bit about just before our results in our Climate Day around some of the partnerships that we're looking to develop sort of to help really link the supply-demand side to make it much easier for customers both to get the financing and support and for businesses to unlock the revenue opportunity. So increasingly, you'll see us talk about the partnerships, the practical support that will really trigger the demand supply.

One point to build and I realize it's implicit in my mind, but no explicit. As I talk in my day job about helping homeowners get through that transition, the same tools, the same support is needed for building owners who happen to be businesses. So we see that working across the organization, the same partnerships are equally relevant for business customers as they are for the homeowner customers. Again, that's implicit in everything we do, but I should have made that explicit.

I think on the data and the PCAF scores, referring to Katie's previous answer, which we take out this closure very seriously. So -- and we're trying to be as transparent as we possibly can about that. So we'll learn over time what that means. And I think we'll be disclosing that in a way that hopefully is helpful to everybody to come to a judgment on where we are and where we think we're going to be in a period of time.

I mean, I think , as the data gets better and better and we get more insight, that will accelerate the insight. We've got Carbon Planner, which is the tool that we make available digital to free to SMEs is really to help them map and see what's in there sort of supply chain, which allows them to collect data mainly to help them find the solutions, but it gives us more data and insight into their footprint. So the tools that we provide also give us better insight, and it's giving our customers better in sight, so there is a kind of circular benefit.

Great. I'm afraid that brings us to the end of a lot of time. So just for me to say thank you very much for your attendance and for your participation. There is outside some tea and coffee and the panel will be outside if you'd like to continue any of these conversations further. But thank you very much, indeed.