A new report investigating the climate-related risk practices of 28 of the world’s largest banks has found that, while these risks have been assigned more priority, financial institutions are not adapting fast enough to a world with a fast-changing climate.
With scientific consensus solidifying the awareness we have of climate change-related risks, investors have begun to pressure financial institutions to begin incorporating climate risks into their business practices. This has of course led to the global divestment movement, but also created a new metric by which financial institutions and banks must do business — i.e., incorporating the risk of climate change-related disasters, changes, and mitigation into their thinking. Investments must be proofed against becoming stranded — an underlying financial principal driving the divestment movement, alongside social responsibility.
A new study led by Boston Common Asset Management, and backed by investors with $500 billion worth of assets currently under management, has shown that banks are failing to quickly align their business practices with global targets to minimize global temperature rise to below two degrees. The risk of climate change has certainly increased in financial institutions, but the report finds that adapting to these risks is simply not being done fast enough.
The report examined the management of climate-related risks by 28 of the world’s largest banks, and found that more than 70% of the banks involved in the study now undertake carbon footprints or environmental stress tests. Further, more than 85% of the banks disclosed financing or investment in renewable energy. More than 80% of the banks now have more explicit oversight of climate risks at the board level, and almost two-thirds have established performance goals.
Of particular interest was the actions of some banks, such as Credit Suisse, which has restricted its policy to prevent lending to the coal mining and thermal power generation sectors.
And while all of these are good signs, the report claims that “banks are moving forward, but not quickly enough to keep pace with risks from a rapidly-changing climate,” nor are they doing enough to embed climate risk into their assessment of credit, nor are they taking full advantage of the opportunities provided by the current transition to a low-carbon economy.
The report finds that more than 80% of the banks involved in the study are not yet integrating the results of their environmental stress testing into their business decisions — raising the question of why they are being done at all.
“For example while major banks such as Citigroup, PNC Financial, and Westpac now undertake environmental stress testing on their credit portfolio; the vast majority of the banks assessed (over 80%) do not yet integrate the results of environmental stress testing into their business decisions.”
Only 35% of banks disclose goals for energy efficiency financing, less than 40% have set targets for renewable energy financing, and only 50% of the banks have explicitly linked climate-strategy goals with compensation for executives.
“From stress tests to strategy, bonuses to benchmarks, investors are very pleased to see the new tools, policies and programs that banks are adopting to manage climate risk,” said Lauren Compere, Managing Director at Boston Common Asset Management.
“But there remains room for improvement and serious issues of integration that must be resolved. The investors behind this report call on banks to not only expand the use of tools to collect climate data — but most crucially to integrate this data into their decision-making process. There is no point in having tools without putting them to effective use.
“It makes little financial sense that bank financing of carbon-intensive sectors such as coal – likely to become stranded assets, still outpaces green financing.”
The investors backing the report have subsequently called on banks to take the following actions:
- Formalize long-term climate strategies focused on financing and lending activities, with performance goals and links to compensation at the Group and business unit level
- Expand the use of assessment tools such carbon footprinting, environmental stress tests, and economic scenario analysis and integrate those findings in decision-making processes
- Establish and disclose more explicit goals and targets focused on reducing exposure to carbon-intensive sectors and increasing investment in renewable energy, energy efficiency, and climate adaptation
- Support coordination and collaboration of industry initiatives to accelerate the pace of change and use their public voice on climate action to encourage better government policy aligned with a below 2 degrees Celsius future
“This global initiative has contributed an important international voice to local investor and community scrutiny of the Australian major banks’ climate responses,” siad Stuart Palmer, Australian Ethical Investment. “Following the initial engagement, each of the banks made encouraging statements at the end of 2015 to align their businesses with the 2 degree future agreed in Paris. The ‘refreshing’ of the engagement in 2016 was again well-timed, coinciding with a focus on practical questions about whether the banks will fund specific thermal coal projects planned for Queensland — leading to some welcome indications that the answer will very likely be ‘no’.”