Banks need to respond faster on climate

If there is one thing most banks can agree on, it's that very few like uncertainty. For many years, banks have also been claiming that it is uncertainty, especially on the direction of global regulation, that has prevented them from acting decisively on climate change. However, things have changed.

The signing of the Paris Agreement in December and ratification by 19 countries already has put the world on a clear trajectory toward an economy that will keep the rise in global temperature to no more than 2 degrees Celsius above preindustrial levels. A challenging target given that last year, the temperature rise already surpassed the 1-degree threshold, according to data Nov. 9 from the Met Office, the U.K. government's weather service.

The uncertainty has been removed. Yet banks still remain slow to respond.

New research released in June from four non-governmental organizations — San Francisco-based Rainforest Action Network; Oakland, Calif.-based Sierra Club; Washington-based Oil Change International; and BankTrack, based in Nijmegen, the Netherlands — suggested that by pumping billions into extreme fossil fuels, the world's biggest banks are shortchanging the climate by investing heavily in companies whose long-term success depends on runaway climate change.

“Shorting the Climate,” a report on the organizations' research, highlighted $307 billion of financing from major banks of oil projects it classifies as extremely damaging to the environment, such as the Arctic, tar sands and ultra-deep offshore developments. Using the oil reserves from these developments could make it almost impossible to keep within the 2-degree Celsius limit set in Paris, therefore presenting the highest level of financial risk.

However banks are not guilty of all charges. A landmark report covered in Pensions & Investments, Oct. 22, 2015, examined 61 of the world's largest banks on their management of climate-related risks and found positive trends, too.

Australia and New Zealand Banking Group set a target to increase lending to gas and renewable power generation by 15% to 20% through 2020. Bank of America Corp. has made a commitment to finance $20 billion of new climate mitigation, adaptation and energy-efficient technologies and Citigroup Inc. has successfully directed $54 billion toward climate change-related opportunities.

Wells Fargo & Co. also showed some best practice by disclosing that renewable energy projects owned in whole or in part by the bank produced 11% of U.S. solar photovoltaic and wind energy generation in 2013.

I along with other institutional investors are seeing leadership in places such as U.S. regional bank PNC Financial, which has adopted annual environmental stress tests. The first in 2015 analyzed the regulatory impact of the U.S. Environmental Protection Agency's clean power plan on its coal and utilities portfolios. In Canada, TD Bank Group has begun to embrace climate change as a real economic opportunity, as well as a risk. The bank became carbon neutral in 2010, while concurrently investing in green buildings, energy efficiency and renewable energy sources alongside financing an industry-leading $500 million green bond.

These responses are encouraging but, taken together, form only the tip of the iceberg of what is needed to tackle this enormous global challenge. The world's 20 largest banks, representing more than $2 trillion in market capitalization, are crucial players in combating the impact of climate change.

First off, banks need to a better job of monitoring and managing their carbon risks. They should assess the carbon risk of their lending and underwriting, conduct climate-related stress tests and start measuring their carbon footprint. Banks need to reduce uncertainty for themselves and their clients by starting to think about climate change as one of the most important parts of their global strategy, rather than a variable on the periphery.

At the same time, if they are to remain competitive in the marketplace, banks need to very quickly grasp the full potential of green financing. According to Dimitris Tsitsiragos, vice president, global client services, International Finance Corp., Washington, an estimated $1 trillion is needed annually for climate-aligned investments, including $450 billion for countries outside the Organization for Economic Co-operation and Development. The Climate Bonds Initiative, an investor-focused not-for-profit based in London, estimates that labeled green bonds issued globally in 2015 represented less than 1% of total U.S. dollar bond issuance and less than 0.2% of debt securities issued globally.

More tools are available for banks to make the changes required.

For example, bodies such as the Washington-based World Resources Institute, the Geneva-based U.N. Environment Programme's Finance Initiative and Paris-based NGO 2 Degrees Investing Initiative recently provided new guidance on strategies and metrics to help the financial sector align with the 2-degree pathway, while the Financial Stability Board's Task Force on Climate-related Financial Disclosures is focused on corporate financial disclosures related to both physical climate risks (such as flooded land and droughts) and non-physical climate risk (such as changes to regulation, technologies or litigation). There is even discussion at the European Union level of carbon stress testing being considered for financial sector actors.

The landmark agreement signed at COP 21 Paris climate summit last year has succeeded in clearing much of the regulatory uncertainty that has held back low-carbon financing. Banks should respond and set a defined path to navigate through climate-change risks and embrace climate-change opportunities.

Some have made positive steps, but there is an urgent need for financing to flow faster and at greater volume away from fossil fuels and into energy efficiency and other low-carbon projects.

We must heed the words of Mark Carney, governor of the Bank of England: “The challenges currently posed by climate change pale in significance compared with what might come. ... In other words, once climate change becomes a defining issue for financial stability, it may already be too late.”

Banks need to get on with it.

Lauren Compere is director of shareholder engagement, Boston Common Asset Management LLC, Boston.