By Katie Kedward, Project Officer, ShareAction

  • Investors should be concerned by the substantial financial risks faced by the banking sector as a result of climate change.
  • Banks have made encouraging progress in improving their approaches to climate-related risks but the average bank scored just 42% in our ranking: there is a lot more work to be done.
  • Investors should press banks to disclose high-carbon asset exposure; align sector policies to the Paris Agreement <2°C commitment; and engage with clients on climate-risk

Investors should care about what banks are doing to combat climate change. No longer simply an ethical or moral issue, climate change increasingly threatens to impact financial performance through both the physical and liability risks of the changing climate and transitional risks as legislation, technology and regulation shift to facilitate the low-carbon economy.

Banks are especially exposed to such climate-related financial risks via the wide spectrum of companies they lend to. Indeed the Bank of England has been sufficiently concerned about the potential risks to financial stability to launch its own review of the UK banking sector’s exposure to climate change.

Yet banks also have the potential to be powerful accelerators of the low-carbon transition, if they direct their ability to mobilize capital to tackle the immense challenge of climate change.

Two years on from the Paris Agreement, ShareAction has released a report that ranks the 15 largest European banks’ approaches to climate change. As the first of its kind, we intend our report to support investors in engaging with banks by providing a framework to understand how they are performing on financially material climate issues.

So what did we find out?

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The Good Bits

All the banks we surveyed have considered climate change on some level. In fact we had a 100% response rate to our questionnaire indicating that the topic is firmly on the agenda. Nearly all of the banks confirmed they would be implementing the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and many banks had made encouraging progress in developing methodologies for <2°C scenario analysis.

Our survey responses also revealed some examples of good practice in the development of low-carbon products and services (e.g. green loans, green deposits) as well as in the adoption of policies to limit exposure to sectors with negative climate impact (e.g. coal extraction).

Overall, the three French banks surveyed (BNP Paribas, Crédit Agricole and Societe Generale) performed well relative to their European peers. All three banks cited French legislation (notably the 2015 Energy Transition Law for Green Growth) as the factor driving their approaches to climate risk, demonstrating the potential impact of introducing such legislation in other countries.

A Long Way to Go…

Despite encouraging progress, the banking sector still has a long way to go to. BNP Paribas, the highest performing bank on our survey, scored just 107 points out of a possible 162: it is doing just 66% of what it should be doing to fully account for the climate risks it faces and to effectively contribute to the low-carbon transition.

Worse still, the average score across the 15 banks we surveyed was just 68.5 points out of 162. At 42%, that would barely earn the sector a 3rd class degree. There is a lot of work still to be done.


Investors should be concerned by the substantial financial risks faced by the banking sector as a result of climate change.


Here are 3 points we identified as crucial areas for improvement…

1. High-carbon risk exposures: greater transparency needed

Banks scored lowest on questions relating to climate-related risk assessment and management. Almost all banks were unable to provide any more than partial information about high-carbon asset exposure and also lacked any explicit objectives for decreasing that exposure going forward.

Likewise, banks were unable to disclose their low-carbon exposure as a percentage of total assets, although many banks did share their future lending commitments in low-carbon sectors.

HSBC, for example, this year committed US$100 billion over eight years to financing low-carbon sectors and investing in low-carbon funds. Yet with total assets of US$2.75 trillion[i], a yearly commitment of US$12.5 billion seems somewhat less impressive. It is even harder to assess the true impact when we cannot compare it with the size of their current high-carbon financing and investing activities.

2. Sector policies need to be aligned with <2°C degree target

Our report revealed that most bank policies on coal, oil & gas and forestry sectors are not aligned with the commitment of the Paris Agreement to limit temperature rises to well below 2°C.

On coal, for example, variation on the scale and scope of bank policies was substantial. Some exclusions only applied to new clients, certain sectors or emissions intensities, and some policies even had loopholes for developing countries.


Banks have made encouraging progress in improving their approaches to climate-related risks but the average bank scored just 42% in our ranking: there is a lot more work to be done.


With the European coal industry shown to be facing a “death spiral” of losses over the next decade, such piecemeal bank responses to managing the substantial financial risks of this sector should be a serious cause for concern for investors.

3. Banks need to engage more with clients on climate-risk

Our report findings showed that most banks’ client engagement policies lacked clear objectives, timelines or detail on the consequences if clients fall short of requests. Additionally, only three banks are currently engaging with clients on the adoption of the TCFD recommendations. Banks should be leveraging their influence to push for climate action within companies they lend to. This could be done, for example, by reflecting <2°C engagement policies in loan covenants.

Recommendations for institutional investors

Shareholders should be extremely aware that banks currently have climate-related risk exposures that will impact on their long-term value. But more than that, banks also have substantial power to mobilise the vast sums of capital needed to finance the infrastructure for the low-carbon economy.

We think investors should engage with the banks within which they are invested to request better management of climate-related risks and opportunities. Our report includes a number of recommendations for institutional investors to support them in these engagements.

Shareholders should request that banks…

  •  Place increased emphasis on developing scenario analysis
  •  Disclose high-carbon and low-carbon assets as % total assets
  •  Strengthen policies on coal, oil & gas etc. in line with <2°C scenarios
  •  Reflect <2°C engagement policies in loan covenants to clients

Shareholders should also discuss with policymakers and regulators…

  • Potential applicability of France’s Article 173 in other countries

 

  • Transposing TCFD recommendations into national legislation/regulation

ShareAction hopes that our report findings, as well as our framework for engagement, will galvanise action from investors to ensure that the European banking sector is playing its role in supporting, rather than hindering, the low-carbon transition.

[i] Total assets for HSBC Group, taken from 2016 Annual Report

Thanks Katie! To find out more about the results of our ranking, click here.