Strident calls to take decisive action on carbon emissions are loud and clear at the top of the global agenda. On 1 December 2019 at COP25, UN Secretary-General António Guterres urged a ramping up of “accountability, responsibility and leadership” to tackle CO2 emissions – and it’s a demand being made not just to governments, but to financial institutions.
The banking sector’s efforts to address its carbon footprint are firmly in focus, with organizations increasingly expected to show their carbon emissions cards. In December, current Bank of England Governor, Mark Carney, was appointed UN special envoy for climate action and finance, with a mandate to champion precisely that. While in November, European Central Bank President, Christine Lagarde, called for climate change to become a “mission-critical” priority for the ECB. In short, the pressure is on.
Is sustainable finance a realistic objective or an elusive dream? That exact question was posed to the audience at the FT Banking Summit in December, with the overwhelming majority – 81% – believing that positive change of this kind is realistic.
For banks, there are many opportunities to be gained in moving towards a decarbonized economy – from investing in growing renewable energy production, to helping fund the technologies supporting the transition. What’s more, growing demand for products and services aimed at minimizing environmental damage offers an opportunity for banks to develop new product and service portfolios. And with them, the chance to boost reputation by actively contributing to a greener economy and society.
Turning talk into action will not happen overnight. However, if financial institutions are to kick-start moves towards greener practices, it’s crucial that they gain greater transparency over what’s on their books. This way, they can build a clearer picture of the investment areas that are driving emissions intensity – and associated risk – across their portfolio.
Climate action: What’s the current picture for FIs?
Many FIs are already making great strides to become more sustainable. They have learned from the regulatory scrutiny after the 2007/8 global financial crash, and are keen to get ahead of the curve, and pre-empt any new climate action regulations coming their way.
AlixPartners’ analysis into the world’s top 100 banks adds some color to this current picture.
Our qualitative insights, following the assessment of more than 200 annual and sustainability reports, found that banks have already firmly etched sustainability and climate change into their agendas.
However, when it comes to hard action, a number of banks have only gone as far as ‘passive’ measures, such as establishing sustainability goals or climate neutrality initiatives as part of an overall environmental, social and governance (ESG) policy. Only a few are standing at the point of actively changing their business models by exiting carbon-intensive industries.
Slow-burn or full steam ahead?
The banking sector is, by and large, willing to move in a greener direction. But, our quantitative overlay of the top banks’ corporate loan data – as a first indicator of transparency – shows that there are dominant drivers behind the current state of play.
Generally speaking – and as expected – the bigger the bank’s lending book, the more emissions created by the projects and clients they finance.
Break banks’ loan data down further into regions and industries, however, and there is another layer of complexity to unpick. It becomes clear that the emission intensity of a bank’s loan book varies widely, and isn’t so much about size, but location, and the mix of businesses within its portfolio, often largely governed by a region’s economic construct.
Indeed, we found the highest-emitting banks were financing markets built around energy, manufacturing or transport, or in regions, especially emerging markets, where a move to a low-carbon model was traded off against growth so far.
Banks are moving towards transparency and sustainability. However, by not taking immediate action to review their lending and client asset make-ups could see them falling foul of new restrictions imposed by others. If hit by strict external regulations governing carbon-intensive industries and practices, banks run the risk of being financially penalized, isolated, and stunted by associated halts to global capital flows and business opportunities.
Alongside regulatory pressures is an increasingly vocal public, urging divestment from fossil fuels. This public strength of feeling is gaining momentum globally, providing another vital reason for institutional investors to sit up and take notice.
ESG driving risk assessment – and improving performance
Hand-in-glove with financial institutions’ moves away from legacy, carbon-intensive client assets and lending, is the rise of ESG factors in organizations’ performance reporting.
ESG measures are increasingly being built into companies’ broader strategies and assessing risk across the business, rather than being treated as an isolated activity. Standard & Poor’s 2019 Global Ratings found that companies adopting ESG-related strategies mitigated risk potential and bolstered financial performance, with ESG-minded asset investments reaching $30 trillion in 2018, up from $23 trillion in 2016.
With investors increasingly seeking ESG-focused products, growing investor commitment to the UN’s Principles for Responsible Investment, plus pushes from the EU for more transparency on – and mitigation of – risks related to ESG factors affecting the financial system, tackling environmental impact looks set only to become more integral to banks’ future success.
Expert guidance…when it really matters
While banks cannot change their financing and investment activities overnight, greater transparency on lending can help them look harder at the carbon emission footprint of clients, and empower them to take CO2-reducing decisions to transform their portfolios, while moving away from traditional risk calculators.
At AlixPartners, we’re well-versed in helping global organizations review their structures and strategies to enable them to transform and remain relevant in the face of change.
Not only can we help you improve your organizational transparency for internal stakeholders and future investors – we can work with you to develop the right models to steer your business in a greener direction.
Contact our Financial Services team to find out more about AlixPartners’ Zero Emission Financial Services study.