Big banks have a climate change problem. Some don’t have realistic long term decarbonization targets. Others haven’t been willing to restrict their business with high carbon clients. Some bankers have been trying to steer their employers into a lower carbon future, though, with a keen recognition that climate risks are clear, alarming, and need serious attention — but are their peers listening?
What can be done to shift banking practices so that climate risks are a priority?
When it comes to exemplary efforts to lead the way to zero emissions, bankers are fairly low on the list of climate movers and shakers. In March, the Securities and Exchange Commission (SEC) proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.
The required information about climate related risks also would include disclosure of a registrant’s greenhouse gas (GHG) emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. A bank that loans money to fossil capitalists — a company that produces large industrial operations, new “natural” gas facilities, coal powered plants, internal combustion engines, and so many more — would be required to report on the resulting emissions.
Environmental groups such as Sierra Club, Rainforest Action Network, and 350.org have made transparent the culpability of Big Banks like Chase, Citi, Wells Fargo, and Bank of America, among others, for financing tar sands and other fossil fuels.
In May, the Carbon Bankroll was issued, which is a new report that illuminates how corporate cash and investments are major sources of emissions. Their results illuminate how climate-concerned businesses like Google, Meta, Microsoft, and Salesforce are effectively misstating their carbon footprints — they fail to account for cash holdings that banks repurpose, at least in part, to fund fossil fuel development.
What’s needed is a new approach to understanding the nuances of climate banking, as outlined by the Harvard Business Review. By internalizing the reality that today’s finance is reinforcing climate chaos, businesses might conclude that they can’t escape climate change unless they enact fixes. These fixes might include new approaches to climate leadership strategizing, organizational impacts, financed emissions accounting, enhanced public and media awareness of climate risks, splitting financial operations into emissions identifying sectors, and pressuring bank partners to join in the efforts to limit climate risks.
European Banks in Deep Climate Abyss
The European Central Bank (ECB) issued a study this month which has determined that banks in the Eurozone are not adequately prepared for climate risks. A climate risk stress test indicated that 60% of the 104 European banks examined failed to produce necessary frameworks that take climate risks into account. A spokesperson for the environmental organization Greenpeace called the results “shocking.”
These European banks have climate risks worth €70 billion on their books, which is a conservative estimate of the actual climate related risk. According to the results, most banks do not include climate risk in their credit risk models — indeed, only 20% of the banks examined take climate risk as a variable in lending at all.
Frank Elderson, Vice-Chairman of the ECB’s Supervisory Board, stated that “this exercise is a crucial milestone on our way to make our financial system more resilient to climate risks.”
One module of the test focused on imminent losses as a result of extreme weather events. In the ECB’s opinion, adjusted framework conditions and a more orderly transition would significantly reduce the banks’ financial risks. Overall, according to the central bank, nearly two-thirds of banks’ corporate income comes from industrial operations, which are greenhouse gas intensive.
The results were so startling that the ECB itself announced that it wanted to decarbonize its bond holdings and make its monetary policy more climate-friendly.
ECB Governing Council member Andrea Enria told German periodical Manager Magazin that banks in the Euro area need to “urgently” step up their efforts to measure and manage climate risks. Banks are now expected to act decisively and develop robust frameworks for climate stress tests in the short to medium term.
Will a Green Finance Strategy Help to Minimize Climate Risks?
Earlier this year, 23 employees from different banks in the US, Europe, India, and Africa participated in the first session of a 6-month crash course on climate for bankers, organized by the UK nonprofit Finance Innovation Lab (FIL). The program, which wrapped up in March, aimed to nurture a corps of climate advocates within the middle ranks of mainstream banks. The participating fellows included officials from leading fossil fuel financiers like Citi, Barclays, and HSBC, who together learned about climate risk to the financial sector and workshopped ways to accelerate and improve how the banks manage it.
“There are a lot of people pushing on banks from the outside to divest from fossil fuels and invest in the energy transition, including regulators, activists, and investors,” Lydia Hascott, an expert on organizational strategy at FIL who led the program, told Quartz. “But there aren’t so many people looking at employees on the inside. Ultimately it’s they who have to set a net-zero target and follow through on it.”
FIL endorsed the 2022 Green Finance Strategy, which is a critical opportunity to address a major missing piece of the UK’s Net Zero architecture to make London a Net Zero Financial Center. The goals is to align public and private financial flows with the government’s decarbonization, adaptation, and nature goals. The joint statement letter sets out a collective call for the 5 principles to underpin the Green Finance Strategy and ensure it is a success.
- Set out an ambitious, whole-of-government strategy for aligning financial flows with a 1.5 C transition pathway and adaptation and biodiversity goals to be regularly assessed with independent mapping of progress and investment gaps across public and private finance.
- Support action on Phase 3 of the government’s Green Finance Roadmap that actively shifts financial flows in line with a 1.5 C transition pathway.
- Establish a key role for public investment and policy in driving a rapid, fair transition and reducing energy demand.
- Establish a science-based, credible, and robust legal and regulatory framework to incentivize and enforce the private sector transition to net zero.
- Set clear objectives for UK international leadership and cooperation, informed by global justice principles.
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