Get real on climate risk, investors tell banks

A hundred investors managing $1.8tr of assets have signed a letter calling on banks to say more about how they are managing the risk of climate change, and to publish a strategy saying how they support the goals of the Paris Agreement.

  • By Jon Hay
  • 14 Sep 2017
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It is addressed to the CEOs of 62 of the world’s largest banks, from Agricultural Bank of China to Westpac.

The five page template letter — it will have a customised paragraph for each bank — points out that banks are “exposed to a range of climate risks, including regulatory and transition risk, which could have a significant impact on assets and liability risks”.

It suggests that banks follow the reporting guidelines of the Task Force on Climate-related Financial Disclosures, which published its final recommendations in June.

So far, only a dozen banks have signed up to use the TCFD.

“There are really two reasons we are doing this,” said Lauren Compere, director of shareholder engagement at Boston Common Asset Management, which has coordinated the action together with ShareAction, a UK NGO that promotes responsible investing. “One is to keep the pressure on — to show that investors are looking at this.”

No excuses

The second reason, she said, was that many banks said they did not have enough guidance about how to assess climate risk and develop policies around it.

“With the TCFD guidelines now, there is no excuse that there is no guidance,” Compere said. “There is a roadmap, a pathway.”

The TCFD is a voluntary, market-led initiative, started by the G20’s Financial Stability Board, and backed by Bank of England governor Mark Carney and media entrepreneur Michael Bloomberg.

It demands that all securities issuers and investors start to publish, as part of their official financial statements such as annual reports, a statement showing what their strategy is towards climate change, how their board manages the issue, and how they expect their business to perform under specific scenarios, such as 2C of global warming.

Nor box-ticking

Working out how to implement the TCFD recommendations is not easy — they do not comprise an easy spreadsheet to fill in, or multiple choice questionnaire.

But the banks involved have been working together on assessment tools they can use to do their climate strategy reporting.

“The problem is, it could take some time,” said Compere. “What I hope we don’t see again is something like the great project a few years ago called the Greenhouse Gas Protocol, under the UNEP FI and World Resources Institute. They were looking at a methodology for analysing financed emissions. There was a whoile infrastructure set up but at the end of the day they decided there was no one methodology that was good, so they reconvened it under the Portfolio Carbon Initiative. They produced some guidance to investors and finally to banks, but three years is too long.”

Central banks pushing

The sense of momentum towards addressing climate risk is much stronger now, however.

In the past three years, central banks, such as those of the UK, Netherlands and China, have begun to call the attention of banks they regulate to the fact that climate change could bring dangerous physical damage and jarring economic shifts, which may cut a swathe through their credit portfolios.

So far, in the West, regulators are moving slowly and gently — they have not yet done much to compel banks to change their lending and risk-taking.

But they have firmly established the principle that climate risk is a legitimate ground of investigation for those who care about financial stability.

Money to be made

That includes investors — but they are also eager to profit from the coming changes.

“The time for assessment is past,” said Compere. “It’s about comprehensively adopting a governance structure around climate risk, and how the bank is looking at the transition and its role in it, mitigating risk and availing itself of the opportunities. We think this is a potential growth driver for banks.”

One estimate is that $93tr of investment is needed by 2030 to limit global warming to 2C — a huge lending and financing opportunity for banks.

The downside is just as scary. Right now, oil and gas companies financed by major banks and investors are planning $2.3tr of capital expenditure in the next eight years, that are inconsistent with the 2C target, according to a report by Carbon Tracker and the Principles for Responsible Investment. That is about a third of the total capex the fossil fuel sector is planning.

The investors pushing with Boston Common and ShareAction for more proactivity by banks include several big ones, such as Aegon, Aviva, NN, Bank J Safra Sarasin, Royal London, Candriam and Hermes. Most are small, though, including specialist firms and religious orders.

Their letter is quite detailed in its demands, asking for detailed policies on governance, employee engagement and training, how banks engage with their clients, especially in high carbon sectors, support for climate-friendly legislation and specific targets on low carbon business.

It grows out of three years of engagement with banks that Boston Common has been doing, which has involved meetings with many, in the US, Europe and Asia.

Nothing in the middle

“Last year when we were looking at the aggregate industry response from this group of 60 banks, we saw many of the banks beginning to talk about governance around the board level,” said Compere.

Some were restricting financing of coal or more extreme fossil fuel projects, and making some quantitative commitments. “There are two extremes: action on coal, and commitments to green financing and renewables,” Compere said. “What we don’t see is all that stuff in the middle. That’s where banks need to really operationalise and standardise the way they are not only assessing risk, but also promoting their positive role.”

In an appendix, the letter gives lots of examples of best practice. Standard Chartered, for example, “has committed to introducing new assessment criteria relating to climate risks for energy industry clients in order to promote alignment with a 1.5C climate scenario,” the letter said.

Compere said there was no one leader, but she highlighted PNC Financial. “Here’s a regional bank based in Pittsburgh, which has been the focus of some NGO groups over years for their coal lending,” said Compere. “We have invested in them for a number of years. They took what we consider a call to action in the fall of 2014. They have really embraced the idea of looking at climate risk, across especially their corporate lending, doing environmental stress tests, hosting conversations across business units.”

A long way to go

ANZ, Bank of America, Barclays, BNP Paribas, Citigroup, DNB, HSBC, Industrial and Commercial Bank of China, ING, Morgan Stanley, Standard Chartered and UBS are the banks that had signed the TCFD by the end of June.

The top 12 banks in syndicated lending to the oil and gas sector this year, according to Dealogic, are JP Morgan, Wells Fargo, Citi, Mizuho, Royal Bank of Canada, Bank of Montreal, Sumitomo Mitsui Banking Corp, Barclays, Bank of Nova Scotia, Toronto Dominion, Bank of America and HSBC.

Between them, they have lent $76bn to the sector this year, 40% of the $191bn total in the syndicated market.

  • By Jon Hay
  • 14 Sep 2017

Global Green Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Credit Agricole CIB 7,965.23 62 7.00%
2 HSBC 7,415.56 49 6.52%
3 BNP Paribas 5,849.54 39 5.14%
4 JPMorgan 5,394.02 37 4.74%
5 Citi 5,031.45 24 4.42%