MIND THE PERFORMANCE GAP: Banks’ climate shortcomings could undermine Paris Agreement warn investors
$2 trillion investor group engage with 59 of world’s largest banks. New report criticizes banking sector’s “skin deep” attempts to capture climate risks and opportunities.
54% of banks support the Taskforce on Climate-related Financial Disclosures (TCFD), but pace of alignment is too slow.
(15 Feb, Boston), A new report examining climate management by 59 of the world’s largest banks has found urgent shortcomings that threaten to undermine efforts to support the transition to a low carbon economy. The investor report says that despite progress in some areas and several examples of individual best practice the sector is failing to capture the risks and opportunities of climate change.
The ‘Banking on a Low Carbon Future’ report by Boston Common Asset Management, warns that in areas such as ‘climate strategy’, ‘risk management’ and ‘low carbon opportunities’ the banking sector is failing to embed climate into its core practices. The report supports the engagement letter – backed by over 100 investors with almost $2 trillion in assets under management – sent to over 60 banks last September asking about alignment with TCFD.
The report finds that:
Less than half (49%) of banks are implementing climate risk assessments or 2ºC scenario analysis, which means decision-making on portfolio shifts is not supported by robust data.
Despite widespread disclosure of their low carbon products and services, only 46% of banks set explicit targets to promote such products/services.
A majority of banks (61%) have failed to restrict the financing of coal – the most carbon intensive energy source. And the global banking sector provided $600 billion in financing for the top 120 coal plant developers between 2014 and September 2017.
Only two in five banks (41%) ensure the trade associations or industry groups they are members adopt progressive climate policies.
The report however does commend the sector for some high-level advances including:
Almost all are involved in industry or multi-stakeholder groups to advance knowledge-sharing and collaboration around climate risks and solutions
95% have adopted some degree of governance for climate issues internally; and 95% provide some disclosure on low-carbon products and services.
Explicit exclusions for the financing of the most intensive high-carbon sectors (such as tar sands) are becoming an industry norm – 71% have adopted public exclusion policies linked to such carbon-intensive practices.
The investor engagement, known as the ‘banking on a low carbon future’ engagement, has been running since 2014 and this year’s analysis was the first to align its metrics with the new Taskforce on Climate-related Financial Disclosures (TCFD) climate risk framework introduced by financial leaders Mark Carney and Michael Bloomberg. The report found that:
Over half (54%) of banks support TCFD at some level. Barclays has already performed a gap analysis to compare its reporting against the TCFD recommendations & Westpac has conducted a TCFD-aligned climate change scenario analysis.
However only two out of 59 banks have asked their carbon intensive sector clients to adopt the TCFD recommendations.
Lauren Compere, Managing Director at Boston Common Asset Management said,
“The Paris Agreement has started the race to the low-carbon economy and we need the world’s banks to pick up the pace to fund it. Some $12 trillion of investment is needed by 2030 in renewable power generation alone and that is a remarkable opportunity for the world’s banks that they are not currently grasping.
In some areas, and in some individual banks, we are seeing encouraging steps forward but too often climate progress is skin deep at best. Investors want to see much wider implementation by banks of climate risk assessments or climate scenario analysis if they are to align their businesses with the Paris Agreement. As a first step, the TCFD framework provides an agreed global framework for financial institutions to report their climate-related risks. Banks must use it.”
This year we worked with regional partners ShareAction (UK), whose research on 15 European banks supported our analysis, SHARE (Canada), and Australian Ethical Investment (Australia). The report finds some wide regional differences between banks around the world. For example, 80% of European banks have undertaken climate-risk assessments, compared with an average of 33% of banks in each of the North America, Developed Asia and emerging market regions.
The investors call on banks to take four actions:
Disclose their climate risk in line with TCFD recommendations
Publish a company-wide, forward-looking strategy aligned with the Paris Agreement
Set clear targets to increase and promote low-carbon products or services
Disclose public policy positions related to climate change, and to influence their trade associations to take progressive positions on climate legislation.
Shannon Rohan, Director of Responsible Investment, SHARE in Canada, said,
“Banks are one of the largest asset pools in the financial market and have a crucial role to play in the transition towards a sustainable financial system. But so far their contribution is limited. In Canada, climate change is rapidly becoming a priority issue for banks; recently, we have seen some promising developments such as RBC setting out clear position statements on the importance of climate to its business and TD setting targets for increasing its low-carbon lending and financing. Yet none have conducted a scenario analysis for climate risk, and as with the rest of the global banking sector there remains a gap between the positive rhetoric of most banks and the internal processes and targets in place to achieve such goals.”
Sonia Hierzig, Project Manager, ShareAction
“It is a positive development that climate-related issues have started to become a part of the policies, processes and products in most banks globally. Across Europe there is a drive for greater disclosure. This is led by France, where innovative legislation is driving real progress on banks’ reporting of climate change. However, all banks must do more to reduce their exposure to the most carbon-intensive sectors and align both sector and client engagement policies with the goals of the Paris Agreement. Institutional investors have a key role to play in ensuring that this happens.”
Stuart Palmer, Head of Ethics Research, Australia Ethical Investments
“The message from investors to banks could not be clearer: it’s time to align. The global goal set by the Paris Agreement, the consensus around the TCFD climate reporting framework and the clear investment and financing opportunities in low carbon have done all the hard work for the global banking sector. It is now urgent for the world’s largest banks to step up to the plate and adjust their internal policies and management systems, and their products and services, to align with the transition to a low carbon economy.”
Interviews with Lauren Compere and full copies of the report are available on request
• Banks Engaged: Agricultural Bank of China Ltd. (China), ANZ (Australia), Axis Bank Ltd. (India), BBVA (Spain), Banco Santander SA (Spain), Bank of America Merrill Lynch (United States), Bank of China (China), Bank of Communications Co. (China), BMO (Canada), Barclays Plc. (United Kingdom), BNP Paribas SA (France), CIBC (Canada), CCBC (China), CCB (China), China Industrial Bank Co. (China), CMB (China), Citigroup Inc. (United States), CBA (Australia), Crédit Agricole CIB (France), Credit Suisse Group AG (Switzerland), Deutsche Bank AG (Germany), DNB ASA (Norway), Fifth Third Bancorp (United States), HSBC Holdings Plc. (United Kingdom), ICBC (China), ING Groep NV (Netherlands), Intesa Sanpaolo SpA (Italy), Itaú Unibanco Holding SA (Brazil), JPMorgan Chase & Co. (United States), Legg Mason Inc. (United States), Lloyds Banking Group Plc. (United Kingdom), Mitsubishi UFJ Financial Group, Inc. (Japan), Mizuho Financial Group, Inc. (Japan), Morgan Stanley (United States), National Australia Bank (Australia), National Bank of Canada (Canada), Natixis SA (France), Nomura Holdings, Inc.(Japan), Nordea Bank AB (Sweden), Northern Trust Corporation (United States), ORIX Corporation (Japan), BRI (Indonesia), RBC (Canada), RBS (United Kingdom), SEB (Sweden), Société Générale SA (France), Standard Chartered Plc. (United Kingdom), SBI (India), Sumitomo Mitsui Financial Group, Inc. (Japan), SunTrust Banks, Inc. (United States), Scotiabank (Canada), The Goldman Sachs Group, Inc. (United States), The PNC Financial Services Group, Inc. (United States), TD (Canada), UBS AG (Switzerland), UniCredit SpA (Italy), US Bank (United States), Wells Fargo & Co. (United States), Westpac Banking Corporation (Australia). Please note that 12 banks did not respond and were analysed based on publicly available information.
• Some investor signatories have supported Boston Common Asset Management’s program on engagement with global banks over a number of years whereas others have supported a letter to the CEOs of the leading banks in September 2017. This letter and the list of investors can be found at https://shareaction.org/banking-on-a-low-carbon-future
• Investor Letter Signatories include: Boston Common Asset Management, 3Sisters Sustainable Management, LLC, 444S Foundation, Addenda Capital Inc., Adrian Dominican Sisters, Portfolio Advisory Board, Aegon Asset Management, AGF Investments*, Andover Newton Theological School, As You Sow, Australian Ethical Investment, Aviva Investors, Bank J. Safra Saracen, Bâtirente, Caisse de Prévoyance des Interprètes de Conférence (CPIC), Candriam Investors Group, CAP Prévoyance, Christopher Reynolds Foundation, CIEPP – Caisse Inter-Entreprises de Prévoyance Professionnelle, Clean Yield Asset Management, Cometa Pension Funds, Committee on Mission Responsibility Through Investment of the Presbyterian Church U.S.A., Consumer Health Foundation, Dana Investment Advisors, Deaconess Community of the ELCA, Declaration of Trust of William Gee, Dignity Health, Domini Impact Investments LLC, Ecofi Investissements, EdenTree Investment Management Ltd., Edward W. Hazen Foundation, Elo Mutual Pension Insurance Company, Environment & Sustainability strategy, Jupiter AM, Environment Agency Pension Fund, Etablissement Cantonal d’Assurance (ECA VAUD), Ethos Foundation, Switzerland, Everence and the Praxis Mutual Funds, First Affirmative Financial Network*, Folksam, Friends Fiduciary Corporation, Green Century Capital Management*, Hermes Investment Management, Hexavest*, Interfaith Center on Corporate Responsibility, JLens Investor Network, Manaaki Foundation, Maryknoll Sisters, Mennonite Education Agency, Mercy Investment Services, Midwest Coalition for Responsible Investment, Missionary Oblates – OIP Trust, Natural Investments, NEST, Nest Sammelstiftung, NN Investment Partners, Northwest Coalition for Responsible Investment, Nova Scotia Pension Services Corporation, OceanRock Investments Inc., Öhman Fonder, Pax World Funds, Pensionskasse Caritas, Pensionskasse der Stadt Winterthur, Pensionskasse Unia, Polden-Puckham Charitable Foundation*, Prévoyance Santé Valais (PRESV), Prévoyance.ne, Progressive Investment Management, Prosperita Stiftung für die berufliche Vorsorge, Region VI Coalition for Responsible Investment, Reynders, McVeigh Capital Management, LLC, Royal London Asset Management, School Sisters of Notre Dame Cooperative Investment Fund, Seattle City Employees’ Retirement System, Seventh Generation Interfaith Inc., Shareholder Association for Research and Education, ShareAction, Sierra Club Foundation, Sister of the Presentation of the BVM, Aberdeen SD, Sisters of Charity of Saint Elizabeth, Sisters of Providence – Mother Joseph Province, Sisters of Saint Joseph of Chestnut Hill, Philadelphia, PA, Sisters of St. Dominic/Racine Dominicans, Sisters of St. Joseph of Boston, Sisters of the Humility of Mary*, Sisters of the Precious Blood, Solaris Investment Management, Stiftung Abendrot, Storebrand Asset Management, Swift Foundation, The Barrow Cadbury Trust, The Church of Sweden, The Joseph Rowntree Charitable Trust, The LankellyChase Foundation, The Park Foundation, Thomson, Horstmann and Bryant, Inc., Threshold Foundation, Trillium Asset Management, Trilogy Global Advisors, LP, Unitarian Universalist Association, United Church of Canada, UU Congregation at Shelter Rock, Veris Wealth Partners, Walden Asset Management, Wallace Global Fund, Wetherby Asset Management, Wilberforce Foundation, Zevin Asset Management
*Signed a subset of the bank letters
About Boston Common Asset Management
Boston Common Asset Management is an experienced investment manager dedicated to the pursuit of financial return and social change. We invest approximately $2.7 billion (as of 12/31/2017) in Global equities on behalf of institutional and individual investors. We analyze investment risks and opportunities from a broader perspective, because we believe understanding environmental, social, and governance (ESG) issues is fundamental to valuing a company. We combine this research with rigorous financial analysis to build diversified portfolios of what we believe are high-quality, sustainable, undervalued companies. We strive to be responsible stewards of our clients’ assets by seeking competitive investment returns from portfolios of companies that can contribute to and benefit from sustainable, global growth. As shareowners, we urge our portfolio companies to improve transparency, accountability and attention to ESG issues. We are proud to have built a strong investment record and believe we have meaningfully improved corporate practices globally through our engagement.