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A new ranking by responsible investment NGO ShareAction shows that French banks outperform their European peers on climate-related issues. ShareAction’s Sonia Hierzig argues that the UK should follow France in making disclosures on climate-related risks and opportunities mandatory
Banks are affected by climate change in many ways. As financial intermediaries with ties to every industry sector, they face climate-related risks and opportunities. On the one hand, they are exposed to the physical, transitional and liability risks linked to climate change via the clients they lend to and do business with. On the other hand, banks are also able to make a positive contribution to tackling climate change by mobilising the capital required for a successful low-carbon transition.
ShareAction has ranked the 15 largest European banks based on their responses to climate-related risks and opportunities. The three French banks surveyed all came out in the top five, while three of the UK banks ranked in the bottom five banks.
This is partly down to the introduction of Article 173 in France, which requires that all listed companies, including banks, disclose (1) information about the financial risks related to the effects of climate change; (2) the measures adopted by the company to reduce them and; (3) the consequences of climate change on the company’s activities and on the use of goods and services it produces. For banks, it additionally requests the disclosure of the risk of excessive leverage (not carbon-specific) and the risks exposed by regular stress tests.
As regulation appears to be a key driver encouraging banks to manage climate-related risks and opportunities, other countries might benefit from introducing similar legislation to ensure banks headquartered there do not fall behind.
For instance, if the UK government wants to succeed in its ambition of promoting the UK as a global centre for green finance post-Brexit, it should consider introducing similar mandatory requirements on disclosure and stress testing. This is particularly relevant considering the poor performance of several UK banks in this survey, and the fact that the European Banking Authority will move from London to Paris. Banks’ institutional investors should also support necessary changes by engaging with policymakers and regulators.
While the French banks have scored relatively well, it is noticeable that several of the UK banks appear to be lagging behind, including Lloyds Banking Group, Royal Bank of Scotland (RBS) and Standard Chartered. This is not only due to the lack of similar innovative legislation in the UK, but also because many of the UK banks have weaker policies compared to their European peers on the sectors highly exposed to climate-related risks, including fossil fuels such as coal, oil and gas.
For example, Lloyds Banking Group’s policy on coal mining and power merely takes into account breaches of relevant greenhouse gas emission regulations, while other banks have committed to not financing certain coal-related projects and/or companies linked to the sector.
To meet the goal of limiting global temperature rises to below 2°C, there can be no new fossil fuel-related exploration or infrastructure developments, and it is also essential that some fields and mines are closed before they have been fully exploited. UK banks in particular still have a long way to go to align their sector policies with these needs of a successful low-carbon transition, and currently none of the UK banks is fully aligned yet.
While legislative and regulatory action is important, it is also crucial that shareholders in banks request better management of climate-related risks and opportunities within the institutions they are invested in. ShareAction also provides a number of recommendations for institutional investors to support them in their climate-related engagements with banks.
As the surveyed banks generally performed the poorest on the topic of climate-related risk management, it is recommended that shareholders focus their efforts in this area until there are marked improvements.
For example, banks should be encouraged to place increased emphasis on developing methodologies for scenario analysis, strengthen policies on coal mining and thermal coal power generation, oil and gas, deforestation and peatland exploitation in line with below 2°C scenarios, and introduce more stringent below 2°C engagement policies to guide dialogues with clients active in sectors highly exposed to climate-related risks.
Once shareholders note significant improvements in those areas, they might consider also asking banks about climate-related opportunities, their engagement with external actors, such as policymakers, and the governance structures they have in place to ensure climate-related issues are managed appropriately.
ShareAction hopes that this report will encourage action on behalf of institutional investors, policymakers and regulators to ensure the European banking sector acts in support of the low-carbon transition, rather than obstructing it.
Sonia Hierzig is project manager at responsible investment NGO ShareAction.
See also Ethical Corporation's recent briefing on France: How France is stealing a march on sustainabilityclimate change ShareAction banking France europe green finance Lloyds Bank rbs Standard Chartered BNP Paribas