An op-ed guest post by Sonia Hierzig, banking project manager at ShareAction

Banks are affected by climate change from all angles. As financial intermediaries with ties to every industry sector, they face both climate-related risks and opportunities.

On the one hand, they are exposed to the physical, transitional and liability risks linked to climate change via the clients they lend to and do business with. The ‘creditworthiness’ of banks’ clients can, for example, be affected by droughts or floods, climate-related legislation, or climate-related lawsuits.

On the other hand, banks are also able to make a positive contribution to tackling climate change by mobilising the capital required for a successful low-carbon transition. For example, sectors like renewable energy, energy storage and energy efficiency will need a significant amount of funding over the coming years. The International Energy Agency estimates that the world needs to spend US$359 trillion in total by 2050 to avoid catastrophic climate change.

ShareAction’s latest survey ranks Europe’s 15 largest banks based on how they manage those risks and opportunities. This survey shows that, while all of those banks have started considering climate change and how it affects their business, there is still a long way to go until the sector can claim to be aligned with the goals of the Paris Agreement of keeping global temperature rises to well below 2°C, with an ambition for 1.5°C.

Why does climate disclosure matter?

Better disclosure – publishing details about a bank or a company’s exposure to risk – is an important first step to promote alignment with climate targets in the banking sector and beyond.

Not only is the climate-related information banks disclose crucial to their own shareholders, but banks also benefit when the companies they lend to and do business with disclose this type of information – it allows them to carry out more well-informed risk assessments. Indeed, one of the main challenges banks have cited in terms of properly assessing climate-related risks is the lack of data on their clients’ exposure.

ShareAction’s survey includes a number of questions on disclosure, and broadly follows the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). These recommendations advocate for climate-related disclosures in traditional financial filings and have been widely supported, including by the chief executives of several global banks.

While the banks surveyed by ShareAction have generally been supportive of the TCFD recommendations, there is still much work to be done until they will actually be able to implement them fully.

Despite the importance of disclosure, it is important to remember that disclosure in itself is not enough to meet the goals of the Paris Agreement, and that it is essential banks and other actors take action on the back of the information that is provided by developing robust policies to manage risks and harness opportunities.

Why are UK banks lagging behind?

As the report shows, French banks scored relatively well, encouraged by innovative legislation in France. In contrast, it is noticeable that several of the UK banks appear to be lagging behind, including Lloyds Banking Group, Royal Bank of Scotland (RBS) and Standard Chartered.

This is to a large extent due to the fact that many of the UK banks have weaker policies compared to their European peers on the sectors highly exposed to climate-related risks, including fossil fuels such as coal, oil and gas.

For example, Lloyds Banking Group’s policy on coal mining and power merely takes into account breaches of relevant greenhouse gas emission regulations, while other banks have committed to not financing certain coal-related projects and/or companies linked to the sector.

To meet the goal of limiting global temperature rises to below 2°C, there can be no new fossil fuel-related exploration or infrastructure developments, and it is also essential that some fields and mines are closed before they have been fully exploited.

UK banks in particular still have a long way to go to align their sector policies with these needs of a successful low-carbon transition. Currently none of the UK banks are fully aligned with this goal.

What are the next steps?

It is crucial that banks start implementing the TCFD recommendations as quickly as possible. This will allow appropriate action to be taken as a result of the risk assessments and scenario analyses that must been carried out.

Either way, there is still a lot banks can do now. This includes rejecting financing for projects or companies whose activities are clearly misaligned with the goals of the Paris Agreement, particularly if they do not appear to be making any progress towards transitioning away from fossil fuels.

Secondly, it is important that banks’ shareholders use information – such as that found in this ShareAction report along with other sources – about the banking sector’s response to climate change to develop robust engagement plans with their holdings in the sector. It was encouraging to see over 100 investors worth nearly USD $2 trillion write to 62 global banks earlier this year to request better climate-related disclosures, but words need to be put into action – there needs to be a sustained effort to track banks’ progress.

Finally, it is important to note the power that effective legislation and regulation can have, as demonstrated by the French banks’ performance in this survey. In 2015, France became the first country to introduce mandatory climate change-related reporting for institutional investors. Known as Article 173, this is a tool that policymakers could look at replicating in other countries. There is also a lot of scope to think about other innovative measures, for instance around carbon pricing or capital requirements.

The hope is that building on this report’s findings, and the many tools available, banks will continue working to improve their climate-related policies and help support others – from shareholders to policymakers – in their own work on ensuring the banking sector aligns with climate targets. 

Photo: Adam Tinworth via Flickr | CC2.0