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The banking industry in a changing climate – financing the low-carbon transition

By Lauren Compere, Director of Shareowner Engagement, Boston Common Asset Management

Lauren Compere,Director of Shareowner Engagement, Boston Common Asset Management
Lauren Compere,Director of Shareowner Engagement, Boston Common Asset Management

We already know that financing the low-carbon transition will be expensive – from low-carbon technology to mitigation infrastructure – and we know banks will have to play a vital part.

But what does climate best-practice actually look like in the banking industry?

As is often said, what gets measured gets managed. That is why Boston Common leads a coalition of over a hundred investors with assets totalling nearly $2 trillion, calling on the world’s largest banks – including the likes of HSBC, Lloyds, Bank of America, JP Morgan Chase, Morgan Stanley and Deutsche Bank – to disclose more information about their exposure to climate-related risks and opportunities, and how these are being managed by banks’ Boards and senior executives.

The coalition wants banks to supply robust and relevant climate-related disclosure to investors on four key areas: climate-relevant strategy and implementation, climate-related risk assessments and management, low-carbon banking products and services, and banks’ public policy engagements and collaboration with other actors on climate change.

These are also the four core areas that the G20-supported Task Force on Climate-related Financial Disclosures (TCFD) – chaired by financial heavyweights Mark Carney and Michael Bloomberg – offered as a standard framework by which all companies and financial institutions can report on.

What does climate best practice look like? 

Addressing the challenges of climate change requires urgent action, the mobilization of vast sums of private capital and a break from business as usual by companies. Some of the best-practice standards we have seen emerging and encourage across the board include:

  • Risk management commitments such as that made by Standard Chartered, to introduce new assessment criteria relating to climate risks for energy industry clients in order to promote alignment with a 1.5°C climate scenario. We’ve also seen Natixis commit not to finance coal-fired power plants or thermal coal mines, and ING exclude financing directly linked to the mining, exploration, transportation and processing of oil sands.
  • Strategy and governance commitments such as Barclays linking senior executive compensation to company performance on climate strategy-related goals.
  • Commitments to low-carbon products and services. For example, we were delighted to see JP Morgan Chase’s recent commitment to facilitate $200 billion in clean financing through 2025 – one of the largest the banking industry has seen to date.
  • Policy engagement such as that initiated by the insurance sector. In August 2016, Aviva, Aegon and Amlin – which together manage US$1.2 trillion in assets – issued a joint statement urging world leaders to build on previous commitments and end fossil fuel subsidies within four years.Many banks did join industry and multi-stakeholder commitments ahead of the Paris Agreement in December 2015, but further action is needed.

We need to see the adoption of best practices such as these across the board, and that is not just in the interests of the planet but for banks and their shareholders too.

Climate change poses serious material risks….

Banks are exposed to climate-related risks through their lending activities as well as other financial services, including project finance and equity and debt underwriting. These risks are real and wide-ranging, and investors want to know whether they are being managed responsibly and at the highest level of the organisation.

A recent study estimates that the value at risk for investors under business-as-usual scenarios may be equivalent to a permanent reduction of between 5% and 20% in portfolio value in just over a decade.[i]

A recent report published by Carbon Tracker estimates that almost a third ($2.3 trillion USD) of the potential capex to 2025 for oil and gas companies should not be deployed under the International Energy Agency’s (IEA) World Energy Outlook 2016 450 scenario (which could be used as a proxy for a 2 degree scenario).[ii]This number is even higher under a 1.5 degree scenario, which is the aim set in the Paris Agreement.

… But also a once-in-a-generation opportunity

An estimated $90 trillion of infrastructure investment is required by 2030 to limit global warming to 2 degrees[iii]and the banks that take advantage of this once in a generation green opportunity can benefit across all business functions.

The TCFD means climate disclosure is about to go mainstream

Boston Common has been working with banks for several years to encourage greater disclosure and have been joined by an increasingly large coalition of investors. Our work was greatly aided this summer by the recommendations from the Financial Stability Board’s Task force on Climate-related Financial Disclosures (TCFD), which introduced a new universal framework and expectations around disclosure. Although the recommendations remain voluntary at this stage, they could prove game changing. This September the UK Government officially endorsed the recommendations, the French government called for them to be mandatory, and in New York the recommendations were endorsed by a number of leading global companies.

Such initiatives have the power to accelerate action, and banks should use their financial and lobbying clout to advocate for public policy action on climate change. By pro-actively engaging with policymakers and industry groups, banks can help create a regulatory environment that facilitates green financing, adoption of cleaner technologies, energy efficiency measures and renewable use – across both the private and public sectors.

In order to keep global temperatures from rising to dangerous levels, the way we do business will have to change – and urgently.Banks must shift their financing away from the projects of the 20th century, like pipelines and petrol, to the technologies that with fuel a new, sustainable economy and deliver prosperity in the long-term.