(Photo Credit: Joshua Hoehne, Unsplash)
A new report from Boston Common Asset Management surveyed 58 of the world’s largest banks on their responses to climate change. Called “Banking on a Low-Carbon Future: Finance in a Time of Climate Crisis,” the study uncovered plenty of failure.
Although green banking industry initiatives like the Task Force on Climate-related Financial Disclosures (TCFD), the Principles for Responsible Banking, the Katowice Commitment, and the Green Bond Principles are taking off, investment in fossil fuels continues to skyrocket.
The fifth annual report found that only 50% of the banks surveyed are engaging high-carbon clients on transition strategies and just 12% ask high-carbon sector clients to adopt TCFD guidelines.
“These findings indicate a systematic reluctance by banks to demand higher standards from high-carbon sector clients, despite the fact that doing so could vastly reduce bank risk and accelerate action on climate change,” the report says.
Lauren Compere, managing director of Boston Common Asset Management and the report’s author, discusses what the results mean, especially for sustainability leaders in the financial sector.
Why are investments in fossil fuels still so enormous globally?
There is no disincentive to reduce the amount of fossil fuel financing and, in fact, more than 1.9 trillion has been invested in the last three years alone since the Paris Agreement.
Those that might have thought with an increase in green and sustainable finance we would see a natural decrease in “brown” or climate-harmful financing. This is clearly not the case. A lot of it is market driven.
What are the biggest take-aways from the report for sustainability leaders in the financial sector?
While we see more advancement of TCFD on the governance and strategy side, we are not seeing enough impact on decision-making. This points to incremental progress, in particular with broader adoption of TCFD guidance as well as new risk assessment and scenario tools. But these actions have not accelerated the rate of decarbonizing lending and investment portfolios, nor broadened the strategic adoption of low-carbon and green products and services.
We see a reluctance to expand and deepen client engagement and requirements in high-carbon sectors on both transition and physical risk; and risk assessment is not necessarily leading to new financing or investing exclusions or restrictions.
One striking gap is the low adoption rate of deforestation policies that move beyond palm oil, even in advanced markets like Europe. We have seen a greater willingness to engage in public policy and to work collaboratively on tools and knowledge-sharing, but this has not led to the transformative shift needed in the financial sector to meet the goals of the Paris Accord.
How can banking professionals effectively demand higher standards from their high-carbon sector clients?
They must be willing to engage their clients on TCFD and transition plans, and in some cases walk away if they are not responsive. There are also some practice decisions that can be made about exiting or transitioning out of some fossil fuels like coal and oil sands.
Only half of the banks surveyed engage high-carbon sector clients on TCFD and transition plans. We also saw a big gap in addressing clients that are contributing to deforestation. More focus is needed on deforestation, and embracing zero-deforestation and certification schemes for soft commodity clients beyond palm oil.
Any successful examples of getting high carbon sector clients to change?
In 2014 HSBC decided to only finance customers that were already partly certified under the Roundtable on Sustainable Palm Oil (RSPO) and that aimed to complete certification by the end of 2018. Customers were also required to provide evidence of independent verification of their NDPE policies.
As a result of HSBC’s engagement, a number of clients introduced NDPE policies. Those that did not will see their relationship with HSBC discontinued once existing loans are paid.
Where do you see green banking headed?
In large part due to the UK and EU green and sustainable taxonomies, I think we will see more clarity on the definition of green and sustainable finance commitments, more robust implementation of targets and metrics, and more standard and robust certification. I hope this leads to more “net-new” green and clean financing contributing to the low carbon transition.
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