Banking on a low-carbon future

Boston Common Asset Management (BCAM), manager of John Hancock ESG International Equity Fund, recently released a report examining climate management by 59 of the world’s largest banks. Despite finding progress in some areas, BCAM concludes that banks are generally failing to adequately capture the risks and opportunities of climate change.

Banks and climate change

Banks are exposed to climate-related risks through their lending and financial service activities, including project finance and equity and debt underwriting. These risks are real and wide-ranging. A recent study estimates that the value at risk for investors from climate change, under a business-as-usual scenario, may be equivalent to a permanent reduction of up to 20% in portfolio value in just over a decade.

In contrast, the opportunity for banks is substantial. Some $12 trillion of investment is needed by 2030 in renewable power generation alone to limit global warming to 2ºC. Green bond issuance is predicted to reach $250 billion in 2018, according to Moody’s. Banks that finance the transition to a low carbon economy stand to benefit across all business functions.

Addressing the challenges of climate change requires urgent action, the mobilization of vast sums of private capital, and a break from business as usual. In our report, Banking on a Low-Carbon Future, which is the latest in a series of analyses we’ve undertaken since 2014, we examine the progress of 59 of the world’s largest banks in making this critical business shift.    

Outline of the study

Our 2017 analysis, led by BCAM in collaboration with non-profit ShareAction and other partners, looked at three key areas of climate-related disclosure by banks:

  • Climate-relevant strategy and implementation (including public policy engagements)
  • Climate-related risk assessments and management
  • Opportunities for low-carbon banking products and services

These areas align with the new standard framework for reporting by all companies and financial institutions set out by the G20-supported Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was chaired by financial leaders Mark Carney (Governor of the Bank of England and Chairman of the G20’s Financial Stability Board) and Michael Bloomberg (the U.S. businessman and former mayor of New York), and, although its recommendations are voluntary, we believe the TCFD's recommendations may prove to be a game-changer that brings climate disclosure to the mainstream.

Key findings

Our report finds notable progress in a number of areas, from wider industry collaboration to higher levels of support for low-carbon products and services. More banks have also adopted policies that exclude funding to carbon-intensive sectors.

However, we have yet to see widespread adoption of comprehensive climate strategies covering all business functions and intentional commitments to reduce exposure to carbon-intensive sectors backed by explicit targets and timelines. We found limited evidence of banks taking systematic approaches to promoting low-carbon products and services. Furthermore, most of the banks engaged do not appear to be taking a progressive approach to public climate policy. This last component is an obstacle to creating necessary incentives and infrastructure required by the market in order to align with the Paris Agreement commitment.    

Climate strategy

  • Almost all (97%) of the banks we engaged are involved at some level in industry or multi-stakeholder groups to advance knowledge sharing and collaboration around climate risks and solutions.
  • 95% have adopted specific climate governance.
  • Only 58% have a group-wide climate strategy in place.
  • Less than half (41%) ensure the trade associations or industry groups of which they are members adopt progressive climate policies in line with their own.

Risk assessment

  • 71% have adopted public exclusion policies linked to carbon-intensive practices.
  • Only 53% engage carbon-intensive sector clients on low-carbon transition plans, and only two have asked for these clients to report on climate risk as recommended by the TCFD.
  • Less than half (49%) are implementing risk assessments or 2ºC scenario analyses, which means decision making on portfolio shifts is not supported by robust data.

Opportunities

  • 95% provide some disclosure on low-carbon products and services.
  • Around one-third (34%) have not performed robust due diligence or employed third-party assessments to ensure green products meet the highest sustainability criteria.
  • Less than half (46%) have set explicit objectives/targets to increase or promote low-carbon products and services.

    

Download our full report, which identifies leading practices taken by some banks around climate-related issues, highlights important gaps in current bank performance, and shares ideas for investor engagement.

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