The banking industry has not successfully integrated climate change risk into its long-term strategic planning, or understood the implications for its business operations, according to a report by Boston Common Asset Management.
The report, Financing Climate Change: Carbon Risk in the Banking Sector, warns investors may unwittingly be investing in financial institutions that will be adversely impacted by the effects of climate change and calls on investors to push for systemic change in the banking industry to address climate change risks.
For nearly two decades, the Boston Common Asset Management team has engaged the global financial industry including regional development banks, the International Finance Corporation (IFC), and the World Bank, to proactively address the environmental and social risks associated with project financing, lending and investments. This includes Barclays, Deutsche Bank, HSBC, JPMorgan Chase, Mitsubishi UFG, ORIX, PNC Financial and Standard Chartered.
Boston Common Asset Management advises investors to identify best practices and seek out the banks that use them while encouraging the development of strategic management plans to address climate change risk, capture new market opportunities, and increase data collection and reporting.
The report encourages banks to reassess climate risks and to vet opportunities through the following three action steps:
- Recalibrate risk management to integrate climate change. Climate risk is one of many risks that banks face and it should be integrated into the risk management committee deliberations and compliance practices. Specifically banks should: conduct regular stress tests that model the effects of adverse climate events; rebalance portfolios in view of potential risks from climate change; consider the legal and reputational implications of investments; and re-assess loan pricing with an eye to possible shifts in demand for high carbon fuels, and other climate-related changes in consumer behavior.
- Drive financial innovation. Although climate change creates risk, it also creates opportunity. Banks should seek opportunities to finance, underwrite, insure, and invest in new products and services. Business opportunities include increasing energy efficiency, producing more renewable energy, and developing adaptive responses to climate change.
- Develop a long-term climate strategy. Investors need to understand both a bank’s overall environmental vision and the strategy for its implementation. Banks must move beyond anecdotes about individual funded projects and instead provide company-wide assessments of the implications of climate change. Specifically banks should:
- Measure and disclose total carbon footprint
- Align banker compensation with longer-term goals
- Incorporate climate change considerations into board oversight mandates
In conjunction with the publication of this report, Boston Common Asset Management is organizing a global investor coalition to write to 50 banks that are the largest underwriters to carbon intensive industries. The letter calls upon banks to develop a long term climate strategy, helping investors make informed decisions and encouraging banks to play a positive role towards a more sustainable future.
Last year some 22 US investment firms with about $240 billion in assets under management, led by the California State Teachers’ Retirement System (CalSTRS) and the Oregon State Treasurer’s office, signed the Climate Declaration, calling upon federal policymakers to address climate change as an economic opportunity.