The failure of 59 of the world's largest banks to recognize climate risks and opportunities threatens to undermine efforts to support the transition to a low-carbon economy. This is the key finding of a report by Boston Common Asset Management report titled "Banking on a Low-Carbon Future".
Banks play a crucial role in the allocation of capital in the economy by providing financial services to businesses, households, governments and financial institutions.
As a result, banks are exposed to climate change-related risks including extreme weather events such as heat waves, droughts, storms and sea level rise, along with energy transition adjustments to limit greenhouse gas emissions which can create both risk and significant financial opportunities
In 2015, the international community adopted the Paris Agreement on climate action. The main objective of the agreement is to limit the global average temperature rise to well below 2°C and as close as possible to 1.5°C.
However, the report indicates that less than half (49%) of banks implement climate risk assessments or 2°C scenario analysis, and a majority (61%) have failed to restrict the financing of coal - the most carbon intensive energy source.
Remarkably, the global banking sector provided $600 billion in financing to the top 120 coal plant developers between 2014 and September 2017.
The report says that the oil, gas and coal industries will suffer significant revenue losses as a result of reducing greenhouse gas emissions. In addition, the non-compliance of certain investment projects with the 2°C trajectory will jeopardize their financial viability.
Meeting the main objective of the Paris Agreement involves investing in new technologies such as renewable energy, energy storage, carbon capture and storage. All this will not be without consequences on the world economy, and banks cannot ignore this.
Pace of Alignment of Banks with TCFD is Too Slow
Last year, a letter backed by over 100 investors with almost USD 2 trillion in assets under management sent to over 60 banks last September asking about alignment with the Task Force on Climate Disclosure (TCFD).
The TCFD is a working group set up by the G20 Financial Stability Board chaired by Michael Bloomberg that provides recommendations on financial risks related to climate change.
The report says that whilst 54% of banks say they support the TCFD, the pace of alignment is too slow.
The report also points to large regional disparities among banks around the world. For example, 80% of European banks have undertaken climate-risk assessments, compared with an average of 33% of banks in each of the North America, Developed Asia and emerging market regions.
Achieving the main objective of the Paris Agreement requires the adaptation of the entire global economy by reorienting investments in particular, so that they are compatible with sustainable development and resilient to the impacts of climate change.