A new report suggests that while the banking sector has largely integrated climate governance measures into its own business practices, it has been less proactive in pushing corporate clients to do the same.
A Feb. 15 report issued by Boston Common Asset Management LLC found that the global banking sector has almost uniformly adopted corporate strategies and governance structures to begin addressing the business risks of climate change. Until now, those efforts have occurred mostly through public alignment with initiatives such as the Carbon Disclosure Project, Task Force for Climate-related Financial Disclosures, or TCFD, and Green Bond Principles, among others.
In the report, Boston Common critically concluded that banks have been less aggressive when it comes to their external posturing. Only 3% of those surveyed have asked "high carbon sector clients" to consider adopting the TCFD guidance, according to the report.
In its survey of 59 global banks, Boston Common found that at least 95% of banks are engaged in some form of stakeholder engagement to advance the role of climate risk management and associated financial disclosures, including Bank of America Corp., Barclays Plc, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group Inc. and UBS Group AG.
Strength in numbers
The banks surveyed represent about $2 trillion in assets under management, with 95% disclosing individual low-carbon financing goals and product offerings such as green bonds and environmental finance.
Additionally, the survey found that about 76% of banks have endorsed various national and international climate policies, with the Paris Agreement on climate change garnering support from the chief executives of BAML, Citi, Goldman, JP Morgan and Morgan Stanley upon President Donald Trump's decision to pull out of the accord in May 2017.
Specific governance action includes board-level oversight of climate issues as well as key performance indicators tied to executive compensation on climate-related matters. Firms have also increasingly adopted resource exclusion policies, with about 71% of the sample limiting their involvement in financing certain carbon-intensive investments, such as tar sands, coal-fired power plants and deforestation projects, notably including BNP Paribas SA and Natixis.
"As scrutiny increases, investors and other stakeholders want to know not only about a project's financial feasibility but whether banks have considered the potential for these to become stranded assets or harm a bank's reputation with the loss of its client's social license to operate," said Boston Common's director of ESG research, Steven Helm.
While banks have made "encouraging progress" on their internal approach to managing exposure to climate risks, Boston Common noted their external positioning has been more tepid. Only 53% of those surveyed point to having initiated conversations with carbon-intensive corporate clients — oil, gas, power, utilities, automobiles, materials and agriculture — on their "low-carbon transition plans." Such efforts are largely confined to Europe, Boston Common found in the report.
One recommendation is for banks to "align their client questionnaires and environmental and social due diligence with the TCFD recommendations." Another approach is to push industry trade groups to recognize and advocate for progressive climate policies at the risk of undermining "business opportunities linked to progressive market regulations and subsidies to support the low-carbon transition."
Less than half of banks surveyed have initiated internal climate risk assessments consistent with the 2-degree-Celsius target outlined in the Paris climate agreement, with Citigroup highlighted as among the only U.S. banks implementing such scenario analyses within future stress tests.
As such, banks are encouraged to publish forward-looking climate strategy reports specifically addressing climate risks from the Paris targets in addition to disclosing their public policy positions on certain climate policies and associated lobbying efforts. Boston Common further recommended that banks bring on third parties to verify that their green and low-carbon products "adhere to best practices."