Banking on Climate Change

In little over a month 196 world leaders will gather in Paris at the COP21 climate summit attempting to set a framework to keep the world within a two degree temperature cap -- a limit which experts believe would prevent the worst impacts of climate change.

Big challenge, big opportunity

If we are to de-carbonise the global economy it is a massive undertaking that will require both the reallocation of resources and a technological revolution, and the funding requirements for such an undertaking are immense. For example, 55 countries have submitted their plans for mitigation and adaptation projects ahead of COP21, and the price tag for these projects is approaching US$5 trillion, which is about the same as the combined annual GDPs of Canada and Germany. While the IPCC estimates that the energy sector alone needs an additional investment of up to US$900 billion if average global temperatures are to be capped at two degrees .

For the private sector -- especially the banking sector, meeting these funding needs is a huge challenge, but also a huge opportunity. That opportunity is to support the transition to a low carbon economy by investing in and financing renewable energy and energy efficiency projects and technology.

Opportunity lost?

During the last year my firm Boston Common Asset Management, with support from 80 institutional Investors who collectively manage near US$500 billion in assets, have conducted a research project to assess 61 of the world's largest banks on their practices and long-term approaches to climate risk. The findings of this project, released last week, show a disconcerting lack of strategic or long-term approach to climate risk by our leading banks -- and this means that many of the opportunities linked to climate change mitigation and adaptation, are not currently being grasped. For example, our research revealed that less than half the banks adequately assess the carbon risk of their lending and underwriting activities or conduct climate related stress tests. While fewer still disclose how they define clean-tech or clean energy.

A shrinking window

The limited disclosure on climate exposure and lack of long term strategic planning by banks is worrying. This is because once climate change becomes a defining issue for financial stability it will probably be too late. As Mark Carney, the Governor of the Bank of England noted earlier this month, there is still time to act, but the window of opportunity is both finite and shrinking. The risks to financial stability can be minimized if the transition towards a low carbon economy begins early.

Some good projects, but more is needed

Some banks are leading the way. For example, the research in our banks and climate change report found that Dutch Bank ING and Norway-based DNB both report direct 39% and 36% of their energy portfolios, respectively toward renewable energy. While US giant Wells Fargo reported that their renewable energy assets produced 11% of U.S. solar photovoltaic and wind energy generation [1].

Our report also found that in the southern hemisphere, ANZ bank is already the largest financer of renewable energy in Australia and aims to increase its proportion of lending to gas and renewable power generation by 15-20% by 2020 .

However more is needed. Globally, banks need to go further and faster both in terms of disclosing their exposure to climate change risks and in their financial support for the transition to a low carbon economy. Banks with limited exposure to carbon intensive and sunset industries and strong investments in increasingly popular energy efficient technologies are set to win big.

The more our leading banks act and invest with foresight; the less they will regret in hindsight.