With 80 percent of the largest banks in the world not yet integrating climate data into their core decision-making processes, the banking sector is still failing to adequately address climate-related risks. This is the latest message from a $500bn coalition of investors led by Boston Common Asset Management in a new report, On borrowed time: banks and climate change.
While the banking sector as a whole needs to speed up its response to climate change, the new report does find some encouraging recent progress. For example, over 70 percent of the 28 leading banks analysed are now undertaking carbon footprints or environmental stress tests, including the likes of Citigroup. Encouragingly, over 80 percent are now adopting more explicit oversight of climate-related risks at board level.
Moreover, a number of banks are taking more tangible climate-related actions. Credit Suisse, for example, is revising its policies to restrict lending to the coal mining and thermal power generation sectors, while National Australia Bank plans to invest AUD 18bn ($13.8bn) in energy efficiency, renewable energy and low-emissions transport over the next seven years.
While 70 percent of banks collect climate data, more than 80 percent do not integrate the results into business decisions
Other forward-thinking institutions, such as Standard Chartered, have recognised the importance of aligning their clients’ business strategies within the 1.5 degrees Celsius climate scenario stipulated by the Paris Agreement. As a result, they are developing specific climate risk assessment criteria for their energy sector clients.
Too little, too slowly
However, with the Paris Agreement now in force, the key conclusion of the report is that the examples highlighted above remain too few and far between. While 70 percent of banks collect climate data of some description, more than 80 percent do not currently integrate the results into their risk management and business decisions. The banking sector as a whole is also failing to take proper advantage of the investment opportunities that come with shifting to a low-carbon economy.
According to the 2015 report Are Banks Prepared for Climate Change?, it is estimated that $4.8trn of funding is required for the transition to a less carbon intensive world. It is thus perplexing to find that less than 40 percent of banks have set targets for renewable energy financing, and only 50 percent have explicitly linked climate strategy goals to executive compensation.
What’s more, bank lending and investment in carbon intensive sectors, such as coal mining, Arctic oil drilling and LNG – likely to become stranded assets under tightening environmental regulation – still significantly outpace low carbon financing. In the past three years alone, European and North American banks have financed $786bn to some of the most carbon intensive sectors.
A crucial element
We need to start seeing a sizeable shift in these statistics. The financial crisis of 2008 shook the banking sector to the core but, if left unchecked, climate change could cause value destruction on an even greater scale.
It is essential that 2017 is the year in which all global banks demonstrate that they are taking climate risks seriously. We need to see our leading banks working towards clear targets to reduce exposure to sectors vulnerable to climate change, increasing investment in renewable energy and energy efficiency, and linking executive compensation to climate strategy.
Momentum is building behind meaningful climate action in the private sector and banks must not risk getting left behind. In December 2016, the Task Force on Climate-Related Financial Disclosures, led by Bank of England Governor Mark Carney and Michael Bloomberg called for companies and investors to disclose how profits might be hit by tighter emissions rules and extreme weather events. Banks should follow suit and get on the fast track to establishing practices that both reduce their vulnerability to climate change and accelerate the transition to a low-carbon economy.
The information in this document should not be considered a recommendation to buy or sell any security. For further information, please visit Boston Common Asset Management.