The devastation caused by Hurricane Irma across the Caribbean and Florida has served as a reminder to pension funds and asset managers of the urgent need to step up the fight against climate change. Financing new low-carbon technology and climate mitigation infrastructure will be on the agenda this week during New York Climate Week, highlighting the important role the world’s 60 biggest banks have to play in rising to this challenge, as the main financial intermediaries in the global economy.
That’s why this month Boston Common has continued to lead a coalition of over a hundred investors with assets totalling nearly $2 trillion, calling on the world’s largest banks – including the likes of HSBC, Lloyds, Bank of America, JPMorgan Chase, Morgan Stanley and Deutsche Bank - to disclose more information about their exposure to climate-related risks and opportunities, and how these are being managed by banks’ Boards and senior executives.
This month, the coalition coordinated by Boston Common Asset Management and responsible investment non-profit ShareAction, called for more robust and relevant climate-related disclosure to be supplied to investors on four key areas: climate-relevant strategy and implementation, climate-related risk assessments and management, low-carbon banking products and services, and banks’ public policy engagements and collaboration with other actors on climate change.
These are also the four core areas that the G20-supported Task Force on Climate-related Financial Disclosures (TCFD) – chaired by financial heavyweights Mark Carney and Michael Bloomberg – offered as a standard framework by which all companies and financial institutions can report on.
What does climate best practice look like?
So what is it that the investors want the banks to do?
Addressing the challenges of climate change requires urgent action, the mobilization of vast sums of private capital and a break from business as usual by companies. Some of the best-practice standards we have seen emerging and encourage across the board include:
- Risk management commitments such as that made by Standard Chartered, to introduce new assessment criteria relating to climate risks for energy industry clients in order to promote alignment with a 1.5°C climate scenario. We’ve also seen Natixis commit not to finance coal-fired power plants or thermal coal mines, and ING exclude financing directly linked to the mining, exploration, transportation and processing of oil sands.
- Strategy and governance commitments such as Barclays linking senior executive compensation to company performance on climate strategy-related goals.
- Commitments to low-carbon products and services. For example, we were delighted to see JPMorgan Chase’s recent commitment to facilitate $200 billion in clean financing through 2025 – one of the largest the banking industry has seen to date.
- Policy engagement such as that initiated by the insurance sector. In August 2016, Aviva, Aegon and Amlin – which together manage US$1.2 trillion in assets – issued a joint statement urging world leaders to build on previous commitments and end fossil fuel subsidies within four years.
We need to see the adoption of best practices such as these across the board, and that is not just in the interests of the planet but for banks and their shareholders too.
The material risks posed by climate change
Banks are exposed to climate-related risks through their lending activities as well as other financial services, including project finance and equity and debt underwriting. These risks are real and wide-ranging.
A recent study estimates that the value at risk for investors under business-as-usual scenarios may be equivalent to a permanent reduction of between 5% and 20% in portfolio value in just over a decade.
A recent report published by Carbon Tracker estimates that almost a third ($2.3 trillion USD) of the potential capex to 2025 for oil and gas companies should not be deployed under the International Energy Agency’s (IEA) World Energy Outlook 2016 450 scenario (which could be used as a proxy for a 2 degree scenario). This number is even higher under a 1.5 degree scenario, which is the aim set in the Paris Agreement.
The opportunity for banks is also enormous
An estimated $90 trillion of infrastructure investment is required by 2030 to limit global warming to 2 degrees and the banks that take advantage of this once in a generation green opportunity can benefit across all business functions.
TCFD brings climate disclosure into the mainstream
As mentioned in previous blogs, Boston Common has been working with banks for several years to encourage greater disclosure and have been joined by an increasingly large coalition of investors. So we were delighted when this summer the recommendations by the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) introduced new norms and expectations around disclosure in this space. Although these remain voluntary we believe it may prove to be a game changer.
Limiting global warming to less than a 2 degrees Celsius rise requires a major shift in the way we operate financially and economically. As climate risk becomes recognised as critical to banks, investors want to know whether this risk is being managed well and at the highest levels of the organisation.
Lauren Compere is Director of Shareholder Engagement at Boston Common Asset Management.
The information in this document should not be considered a recommendation to buy or sell any security.