The banking sector attendees at Davos this week will have heard a lot about ‘Responsible Leadership’, especially the leadership required to shift private capital towards a low carbon economy. But a Boston Common Asset Management report on 28 of the world’s largest banks, released on day one of Davos, finds the sector is progressing too slowly to address the climate-related risks from those they lend to.
The report, backed by a $500bn coalition of investors, praises several banks including Citigroup, UBS, Barclays and PNC Financial for their climate related innovations, but says the banking sector as a whole is falling short. Over 80% of the banks, for example, are failing to integrate climate data into core decision making.
New practices emerging
Much of the report is good news. A large majority of the banks now undertake carbon footprinting or environmental stress tests to measure climate risk in their lending and financing. Some, such as Standard Chartered, are revising their policies to restrict lending to carbon-intensive sectors like non-captive thermal coal mines and coal-fired power plants and are developing further assessment criteria for its energy sector clients aligned with the Paris Agreement. All four Australian banks covered by the report (Australian and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation) have indicated their public support for a 2 degree Celsius transition, which now need to be turned into actionable policy and lending changes.
Banks increasingly acknowledge climate change as an issue for the highest levels of management, adopting more explicit oversight of climate risks at board level.
But banks on borrowed time
Despite these positive developments, the banking sector as a whole is not doing enough to measure and manage the risks posed by carbon-intensive sectors. While 70% of the banks collect climate data of some description, more than four-fifths do not currently integrate the results into their business decisions.
The Paris Agreement has accelerated the transition to a low-carbon economy, and many banks seem stuck in second gear. It makes little investment sense that in the past three years, European and North American banks have financed $786 billion to projects in coal mining, Arctic oil drilling or LNG - likely to become stranded assets under tightening environmental regulation; or that bank financing of carbon intensive sectors continues to outpace green financing.
Likewise, less than half of the banks have set or disclosed goals for energy efficiency and renewable energy financing. This indicates that most banks are still failing to grasp the opportunities presented by the shift to a low-carbon economy.
Banks must use the tools available
In December, the Task Force on Climate-related Financial Disclosures (TCFD), led by Bank of England Governor Mark Carney and Michael Bloomberg, published its recommendations. They call for companies and investors to disclose how profits might be hit by tighter emissions rules and extreme weather events. The recommendations further underline the building momentum behind meaningful climate action in the private sector. Banks should seize on this, by establishing practices that both reduce their vulnerability to climate change and accelerate the transition to a low-carbon economy.
Most urgently, global banks should demonstrate that they take climate risks seriously by linking executive compensation to climate-related goals and integrating the results of carbon footprinting and environmental stress tests into their decision-making process.
Banks must also establish explicit targets to reduce their exposure to assets potentially stranded due to climate change and increase financing to renewable energy, energy efficiency and climate adaptation.
Davos, and the TCFD recommendations, highlight the essential role banks are expected to play to finance the transition to a low-carbon economy. Climate change left unchecked could cause value-destruction on a scale much greater than even the financial crisis of 2008, but also offers enormous opportunity for the banking sector and beyond.
The information in this document should not be considered a recommendation to buy or sell any security.
Lauren Compere is the Managing Director at Boston Common Asset Management.