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Banks making slow progress on climate risk, says report

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The world’s largest banks are failing to align their business practices with targets to keep global temperature rises below two degrees, a report has found.

The investor assessment comes despite praising banks for introducing measures such as climate stress testing, carbon footprinting and governance for climate risk.
 
The report, backed by investors with USD500 billion in AUM and led by Boston Common Asset Management, is a follow up to the 2015 report “Are Banks Prepared for Climate Change?” It examines 28 of the world’s largest banks.
 
According to the report, over 70 per cent of responding banks now undertaking carbon footprints or environmental stress tests, including banks such as Citigroup, and over 85 per cent of responding banks disclosed financing or investment in renewable energy. For example, National Australia Bank plans to invest AUD18 billion over seven years in energy efficiency, renewable energy, and low-emissions transport.
 
Over 80 per cent have adopted more explicit oversight of climate risk at board level; and almost two-thirds have established performance goals, while some banks, such as Credit Suisse now revising their policies to restrict lending to the coal mining and thermal power generation sectors. Others such as Standard Chartered are developing additional assessment criteria on climate risk for energy sector clients aligned with the Paris 1.5 degrees climate scenario.   
 
However with the Paris Agreement now entered into force, the report concludes that banks are still not doing enough to embed climate risk into their assessment of credit, or taking full advantage of the opportunities the low-carbon transition presents.
 
Over 80 per cent of responding banks are not yet integrating the results of environmental stress testing into their business decisions, while only 35 per cent of banks disclosed goals for energy efficiency financing, and less than 40 per cent have set targets for renewable energy financing.
 
Only 50 per cent of banks have explicitly linked climate-strategy goals to executive compensation.
 
Boston Common is encouraged by the marked progress at many of the largest global banks in addressing climate change, and commend their willingness to hold in-depth discussions and advance the dialogue around climate risk. Notably, over 80 per cent of the banks engaged have implemented substantive policy changes since the end of 2015 related to climate risk. However the core conclusion that the banking sector as a whole is not doing enough to measure and manage the material risks from carbon intensive sectors is a major concern to investors. For example, bank lending and investment to carbon intensive sectors (e.g. coal mining, extreme oil such as Arctic drilling or LNG) continues to significantly outpace green financing. In the past three years, European and North American banks have financed USD786 billion to some of the most carbon intensive sectors.
 
Lauren Compere, managing director at Boston Common Asset Management, says: “From stress tests to strategy, bonuses to benchmarks, investors are very pleased to see the new tools, policies and programs that banks are adopting to manage climate risk. But there remains room for improvement and serious issues of integration that must be resolved. The investors behind this report call on banks to not only expand the use of tools to collect climate data – but most crucially to integrate this data into their decision making process. There is no point in having tools without putting them to effective use.
 
“It makes little financial sense that bank financing of carbon intensive sectors such as coal – likely to become stranded assets, still outpaces green financing.”
 
The investors call on banks to take a range actions including: introducing goals and executive compensation linked to climate strategy; expanding the use of carbon assessment tools (such as environmental stress tests) and integrating them into the decision-making process; establishing explicit targets to reduce exposure to sectors vulnerable to climate change and increasing investment in renewable energy, energy efficiency, and climate adaptation; and supporting industry collaborations (such as the Task Force on Climate-related Financial Disclosures) that increase the pace of change and use their public voice on climate action to encourage better government policy aligned with a below 2 degrees Celsius future. 
 
Stuart Palmer, Australian Ethical Investment, says: “This global initiative has contributed an important international voice to local investor and community scrutiny of the Australian major banks’ climate responses. Following the initial engagement, each of the banks made encouraging statements at the end of 2015 to align their businesses with the 2 degree future agreed in Paris. The ‘refreshing’ of the engagement in 2016 was again well-timed, coinciding with a focus on practical questions about whether the banks will fund specific thermal coal projects planned for Queensland – leading to some welcome indications that the answer will very likely be ‘no’.”

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