I was reading the latest IPCC report recently – it doesn’t make for easy bedtime reading. “Emissions of greenhouse gases from human activities are responsible for approximately 1.1°C of warming since 1850-1900 … averaged over the next 20 years, global temperature is expected to reach or exceed 1.5°C of warming.” Effectively, we’ll hit 1.5°C by 2040 and for it to stay around that range we’ll need to hit net zero by 2050. Despite many government pledges, it’s not difficult for countries to make their numbers appear bolder than they really are.

How are banks responding?
According to a recent report, “The world’s biggest 60 banks have provided $3.8tn of financing for fossil fuel companies since the Paris climate deal in 2015 … overall funding remains on an upward trend and the finance provided in 2020 was higher than in 2016 or 2017.” Yes, fossil fuel financing has actually grown since the Paris Agreement.

In May, The Economist reviewed the world’s 20 biggest ESG (environmental, social and governance) funds. Each held investments in 17 fossil-fuel producers. Six invested in ExxonMobil, America’s biggest oil firm, and two owned stakes in Saudi Aramco, the world’s biggest oil producer. These funds also invest in gambling, alcohol and tobacco. No wonder the Securities and Exchange Commission, Wall Street’s regulator, is concerned that ESG funds are misleading investors. “Greenwashing” is everywhere.

A recent study found that executive compensation policies are failing to drive major change across Europe’s largest banks. In many cases, pay is only linked to cutting carbon emissions from the bank’s offices and branches (known as scope 1 and 2 – the easy part) rather than reducing loans for carbon-heavy industries (scope 3). NatWest, ING and Credit Agricole are the exceptions, either incentivizing their leaders to set climate targets impacting the loans they extend to certain sectors or linking pay to specific climate commitments. While 20 of Europe’s 25 largest banks have pledged to reach net zero carbon emissions by 2050, only Lloyds Banking Group, NatWest and Nordea have committed to halving their financed emissions by 2030 to ensure they’re on track to meet those goals.

There’s little incentive to manage exposure
This is made more difficult because current bank CEOs don’t expect to face the full costs of significant climate risks – by 2040 they’ll be enjoying retirement – so they have little incentive to manage their exposure to it as prudently as they otherwise would. However, these risks will become systemic and seriously affect financial stability.

This is why regulators have taken a serious interest in climate risk exposure. The Task Force on Climate-related Financial Disclosures (TCFD) is becoming the global standard for climate disclosures. Established in 2016 by the Financial Stability Board, TCFD developed a framework for climate disclosures that focuses on governance, strategy, risk management and disclosure. It’s been voluntary so far, but this will change in the next 18 to 24 months.

In November 2020, the UK announced that all publicly listed UK companies with a premium listing will be required to “comply or explain” with the TCFD’s requirements by 2023, with mandatory TCFD-aligned disclosures across non-financial and financial sectors by 2025.

My next two blogs will look at what banks can do to improve their performance, prepare themselves for regulation and build a sustainability roadmap.

For more information, please download our guide – Banks and sustainability: Time to rethink.