On Borrowed Time: New Report Finds Banks Making Slow Progress in Fast Changing Climate
Investors find world’s top banks taking climate more seriously – but failing to institutionalize management of climate risk or opportunities at rate required
(Tue 17 Jan, Boston), A new report examining 28 of the world’s largest banks on their management of climate-related risks concludes they are failing to align their business practices with targets to keep global temperature rises below two degrees. The investor assessment comes despite praising banks for introducing measures such as climate stress testing, carbon footprinting and governance for climate risk.
The report, backed by investors with $500 billion in AUM and led by Boston Common Asset Management, is a follow up to the 2015 report “Are Banks Prepared for Climate Change?”. Today’s analysis finds some notable progress by major banks over the last year including:
Over 70% of responding banks now undertaking carbon footprints or environmental stress tests, including banks such as Citigroup.
Over 85% of responding banks disclosed financing or investment in renewable energy. For example, National Australia Bank plans to invest AUD 18 billion over seven years in energy efficiency, renewable energy, and low-emissions transport.
Over 80% have adopted more explicit oversight of climate risk at board level; and almost two-thirds have established performance goals.
Some banks, such as Credit Suisse now revising their policies to restrict lending to the coal mining and thermal power generation sectors. Others such as Standard Chartered are developing additional assessment criteria on climate risk for energy sector clients aligned with the Paris 1.5 degrees climate scenario.
However with the Paris Agreement now entered into force, the report concludes that banks are still not doing enough to embed climate risk into their assessment of credit, or taking full advantage of the opportunities the low-carbon transition presents. Shortcomings of the banking sector include:
Over 80% of responding banks are not yet integrating the results of environmental stress testing into their business decisions.
Only35% of banks disclosed goals for energy efficiency financing, and less than40% have set targets for renewable energy financing.
Only 50% of banks have explicitly linked climate-strategy goals to executive compensation.
Boston Common is encouraged by the marked progress at many of the largest global banks in addressing climate change, and commend their willingness to hold in-depth discussions and advance the dialogue around climate risk. Notably, over 80% of the banks engaged have implemented substantive policy changes since the end of 2015 related to climate risk. However the core conclusion that the banking sector as a whole is not doing enough to measure and manage the material risks from carbon intensive sectors is a major concern to investors. For example, bank lending and investment to carbon intensive sectors (e.g. coal mining, extreme oil such as Arctic drilling or LNG) continues to significantly outpace green financing. In the past three years, European and North American banks have financed $786 billion to some of the most carbon intensive sectors.
Lauren Compere, Managing Director at Boston Common Asset Management, said:
“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. 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 call on banks to take actions such as:
Introducing goals and executive compensation linked to climate strategy;
Expanding the use of carbon assessment tools (such as environmental stress tests) and integrating them into the decision-making process;
Establishing explicit targets to reduce exposure to sectors vulnerable to climate change and increasing investment in renewable energy, energy efficiency, and climate adaptation; and
Support industry collaborations (such as the Task Force on Climate-related Financial Disclosures) that increase 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.
Sara Nordbrand, Church of Sweden
“The impact of the Paris Agreement is clear – climate change is rising up the agenda and several banks are trying to grasp opportunities in line with the world’s climate goals. SEB is one example, being one of ten banks and investors launching the Positive Impact Manifesto and representing 7.6 % of the global green bonds market. At the same time all banks are grappling with how to measure and manage risks. The questions we are raising during this engagement aim to make them dive deeper and review strategies and policies in order to contribute more to the urgent transition”.
Stuart Palmer, Australian Ethical Investment
“This global initiative has contributed an important international voice to local investor and community scrutiny of the Australian major banks’ climate responses. 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’.”
Interviews with Lauren Compere and full copies of the report are available on request
Banks responded and engaged: Australia and New Zealand Banking Group, Scotiabank, Barclays, BNP Paribas, Canadian Imperial Bank of Commerce (CIBC), Citigroup, Commonwealth Bank of Australia, Credit Suisse AG, Deutsche Bank AG, DNB, Fifth Third Bancorp, HSBC Holdings plc, ING Group, Intesa Sanpaolo, JPMorgan Chase, Mitsubishi UFJ, MUFG Union Bank, National Bank of Australia (NAB), Nordea Bank, PNC Financial, Orix, Royal Bank of Canada, SEB, Standard Chartered, TD Bank Group, UBS, UniCredit SpA, Westpac Banking Corporation.
Investors involved include: Boston Common Asset Management, Aequo (previously Batriente), Australian Ethical Investment, Church of Sweden, Cometa, and Ethos Foundation.
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 over $2 billion on behalf of institutional and individual investors – exclusively offering sustainable and responsible investment options. Each of our strategies intentionally integrates in-depth research into company specific environmental, social and governance (ESG) practices. We combine this research with rigorous financial analysis to build diversified portfolios of high-quality, socially responsible companies. 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. https://bostoncommonasset.com