Climate change: Four priorities for banks

On 29 September, Lab CEO Jesse Griffiths spoke at an event organised by the Institute of Banking and Finance in Singapore and the Chartered Banker Institute on the role of banks in responding to the climate emergency. His presentation is summarised here. This blog originally appeared on the Chartered Banker Institute website, here.

Banks are a bedrock not just of the economy, but also of societies and our environment. They have a critical role to play in helping the world avert climate catastrophe. There are four key priorities for banks if they want to fulfil their true purpose to help people and the planet thrive, and become part of the solution to the climate emergency.

1.   Recognise the scale of the problem

Banks must recognise the sheer scale of the climate risk we face, which means that incremental approaches are simply not good enough: a major step change is needed. The 2015 Paris Agreement sets a target of 1.5 degrees of warming compared to pre-industrial levels. We have already reached one degree of warming, and this is having major climate impacts, like the wildfires that are devastating the Western United States, or the recent flooding in the normally dry Sahel region of Africa that destroyed hundreds of thousands of hectares of croplands and led to loss of life. According to scientists, 2 degrees of warming will be devastating for large swathes of the globe with many low-lying areas becoming uninhabitable, extremes of weather multiplying, millions of people forced to leave their homes and billions of livelihoods affected. We’re currently heading for 3 degrees of warming, the consequences of which would be catastrophic.

The banking sector is not moving fast enough on climate and remains part of the problem, as well as being key to the solution. Despite an increasing number of commitments from banks to align their activities with the Paris Agreement, the latest Banktrack report card found that lending to fossil fuels from 35 of the biggest global banks continues to rise: it was $736 billion in 2019, up from $700 billion the year before. World Resources Institute (WRI) research examining the years 2016-2018 found that even those banks that had committed to increasing sustainable finance were still allocating twice as much to fossil fuels. However, the overwhelming economic evidence is that the economy and banks have much more to gain from supporting ambitious climate action. The Global Commission on the Economy and Climate found that bold climate action could produce $26 trillion of economic gains by 2030 compared to business-as-usual.

2.   Take responsibility and be accountable

For banks to take responsibility means owning not just the direct risk of the climate emergency to banks – which is significant – but also taking responsibility for banks’ contribution to systemic risk. Estimating the impacts of everything banks do – across their whole portfolio – is one key step. Many banks are reporting under the Taskforce for Climate-related Financial Disclosures (TCFD) – which is welcome – but a review of 2018 reports showed that only one in five disclosed how resilient their organisation’s strategy was to climate risks. Some banks are leading the way. For example, Triodos Bank provides a breakdown of its balance sheet – sector by sector – according to climate emissions, while ING’s climate alignment dashboard estimates the CO2 equivalent intensity for key sectors of their portfolio and shows what pathway is needed for Paris alignment.

Accountability means going beyond estimating impacts, to setting targets backed by detailed roadmaps and being transparent and accountable for progress. The roadmap should set targets for: rapidly exiting from fossil fuel financing; decarbonising clients across each sector of the balance sheet; and scaling up transformative investment in climate solutions.

3.   Stop finance flows to fossil fuels

There is no justification for banks providing new funding for fossil fuels, and existing support needs to be rapidly withdrawn. Fossil fuels account for over three-quarters of global greenhouse gas emissions – urgently phasing out their use is a climate priority.  Many banks have made a commitment to phasing out fossil fuel funding, though many only partially. As we have seen, banks remain major funders of fossil fuel extraction but the evidence shows that there simply is no room for this. A recent study showed that exploiting the oil, coal and gas fields already in operation – without opening any new fields – would already take us beyond 2 degrees of warming. Even if we take coal out of the equation, existing oil and gas fields already take us beyond 1.5°C of warming. Conversely, funding fossil fuels creates huge economic risks of ‘stranded assets’ – fossil fuel reserves that can’t be extracted if governments meet their climate commitments. The Financial Times estimates that meeting the Paris Agreement target of 1.5 degrees would mean 80% of all oil and gas reserves would be stranded and would become worthless investments.

Some banks continue to fund fossil fuel companies on the grounds that they need help transitioning. This results in continuing to fund the problem, unless fossil fuel companies demonstrate credible plans to align with the Paris Agreement. Unfortunately, a recent report shows that the plans of all major oil companies plans are not in alignment so banks need to be tougher on fossil fuel companies and divest until such plans become credible.

4.   Embrace the opportunity to fund a sustainable future

Banks have a hugely important positive role to play in funding a sustainable future – by helping their clients to decarbonise their balance sheets, and ramping up green finance. The Taking the Carbon out of Credit report, written by the Climate Safe Lending Network, of which the Lab is part, sets out ten key ways banks can work intensively with clients to help put them on a pathway to climate-friendly operations. Where clients are not willing to put in place rapid climate transition plans, then banks must take their responsibilities seriously and stop funding them. Scaling up bank finance for a sustainable future is a massive opportunity for banks. By shifting funding to the technologies and industries we need for a just green transition, banks can not only be key players in solving the climate crisis, but also open up major new opportunities for themselves. A recent study of the world’s top 100 commercial banks found that those banks that scored well on environment, social and governance (ESG) issues also did better financially. This will become increasingly true in the future.

Of course, banks are not the only institutions that must act with greater urgency and seriousness. I have previously suggested some actions governments should take to compel the financial system to move far quicker to address the climate emergency. All citizens also have an opportunity to push financial institutions and governments to act now with greater urgency. In a time when the COVID-19 pandemic has shown us how devastating global crises can be – and the impacts of climate change will, on our current course, be far, far worse – the need to act now could not be clearer. All banks must step up, reject small-scale approaches and take serious action so that they can become leaders of the climate solution rather than part of the problem.