BANK’S CLIMATE SHORTCOMINGS COULD UNDERMINE PARIS AGREEMENT
Lauren Compere, Managing Director, explains the results of our engagements with the world’s largest banks
As the adverse effects of climate change become more present with each day, the international finance community must step up to the plate and take a leading role in combating what is arguably the biggest challenge facing our globe. However, a new report examining climate management by 59 of the world’s largest banks has found urgent shortcomings that threaten to undermine efforts to support the transition to a low carbon economy. The investor report says that despite progress in some areas and several examples of individual best practice the sector is failing to capture the risks and opportunities of climate change.
The ‘Banking on a Low Carbon Future’ report by Boston Common Asset Management, warns that in areas such as ‘climate strategy’, ‘risk management’ and ‘low carbon opportunities’ the banking sector is failing to embed climate into its core practices. The report supports the engagement letter — backed by over 100 investors with almost $2 trillion in assets under management — sent to over 60 banks last September asking about alignment with TCFD.
Among the report’s findings, perhaps most troubling to investors is the fact that less than half of the banks assessed are implementing climate risk assessments or 2ºC scenario analysis, which means decision-making on portfolio shifts is not supported by robust data. Also of concern, is that despite widespread disclosure of their low carbon products and services, only 46% of banks set explicit targets to promote such products/services.
While policy leaders push to lower greenhouse gases, making commitments such as the Paris Agreement, banks are not doing their part to transition to low carbon. In fact, a majority of banks (61%) have failed to restrict the financing of coal — the most carbon intensive energy source. Further, the global banking sector provided $600 billion in financing for the top 120 coal plant developers between 2014 and September 2017. The fact that only two in five banks (41%) ensure the trade associations or industry groups they are members of adopt progressive climate policies, highlights the industry’s neglect of this pressing issue.
In Europe, the recent recommendations of the European Commission’s High-Level Expert Group (HLEG) on sustainable finance should put more pressure on banks to act. HLEG aims to help ‘hardwire’’ the consideration of long-term material risks into the policies of all EU capital market players including banks, with specific ideas to incentivize green financing and lending being recommended. The estimated funding need to meet the EU’s Paris Agreement target by 2030 is €180 billion per year.
The investor engagement, known as the ‘banking on a low carbon future’ engagement, has been running since 2014 and this year’s analysis was the first to align its metrics with the new Taskforce on Climate-related Financial Disclosures (TCFD) climate risk framework introduced by financial leaders Mark Carney and Michael Bloomberg. Results of the report once again indicate that the banking community still has a long way to go. It is encouraging that over half (54%) of the banks support TCFD at some level and Barclays has already performed a gap analysis to compare its reporting against the TCFD recommendations & Westpac has conducted a TCFD-aligned climate change scenario analysis. However, investors should take heed in the fact that only two out of 59 banks have asked their carbon intensive sector clients to adopt the TCFD recommendations.
While the international banking community is not progressing at the pace needed, there are several actions it has taken that are commendable. For instance, almost all the banks assessed in the report are involved in industry or multi-stakeholder groups to advance knowledge-sharing and collaboration around climate risks and solutions. Similarly, 95% have adopted some degree of governance for climate issues internally; and 95% provide some disclosure on low-carbon products and services. Additionally, explicit exclusions for the financing of the most intensive high-carbon sectors (such as tar sands) are becoming an industry norm with 71% having adopted public exclusion policies linked to such carbon-intensive practices.
The race to a low-carbon economy began at the Paris Agreement in 2015. However, the world’s banks have been sluggish to join the race and are showing merely a skin-deep commitment to green finance. Some $12 trillion of investment is needed by 2030 in renewable power generation alone, that’s a remarkable opportunity for the world’s banks. Unfortunately, the banking community continues to neglect this opportunity plodding along failing to recognize the gravity posed by climate change and its ability to serve as a talisman for achieving the Paris Agreement.