How financial institutions are taking meaningful action on climate change

Financial institutions will be a critical catalyst in tackling climate change and achieving net zero CO2 emissions, but how are they measuring, mitigating and acting on climate risk?

In August, the United Nation’s Intergovernmental Panel on Climate Change (IPCC) warned that climate change was widespread, rapid and intensifying, and that some trends were irreversible. However, “strong and sustained” reductions in emissions of carbon dioxide (CO2) and other greenhouse gases could quickly make air quality better, and in 20 to 30 years global temperatures could stabilise, according to IPCC scientists.

As capital providers, financial institutions will be a “critical catalyst” in tackling climate change and achieving net zero CO2 emissions by 2050, says Amy West, Managing Director, Global Head of Sustainable Finance & Corporate Transitions at TD Securities. In 2020, the Canadian bank announced its Climate Action plan, including a target to achieve net zero greenhouse gas (GHG) emissions associated with its operations and financing activities by 2050 – the first net-zero target from a Canadian bank, according to West.

Integrating environmental, social and governance (ESG) factors is a “frontier theme for the finance industry”, according to Germany-based ratings agency Scope Ratings. Progress varies widely between asset classes, investor types, and geographies, with shortcomings relating to ESG disclosures – including greenwashing – undermining market developments.

“Banks, as confidence-sensitive businesses, must address ESG gaps in view of possible legal and reputational risks,” the agency says. “Issues arising today related to greenwashing in the asset management industry will eventually expose banks to similar controversies. Scope considers that proactive ESG integration can provide a competitive edge to European banks if backed by rigorous disclosure and it will increase the scrutiny on ESG laggards.”

Calls for private financial institutions to make commitments to fight climate change have been mounting and myriad finance sector initiatives are under way, many of which will culminate at the UN Climate Change Conference (COP26) in Glasgow in November. Former governor of the Bank of England, Mark Carney, who is now a UN Special Envoy for Climate Action and Finance, has established the COP26 Private Finance Hub, which aims to mobilise private finance to support the re-engineering of economies for net zero GHG emissions.

The Hub will work with the private sector and other stakeholders to develop reporting and risk management tools. It also aims to help investors to identify opportunities in the transition to net zero and to increase private financial flows to emerging and developing economies by connecting available capital with investable projects.

Another initiative, the Glasgow Financial Alliance for Net Zero (GFANZ), launched on 21 April 2021, brings together more than 160 firms representing over US$70 trillion of assets into one sector-wide strategic forum. Financial institutions can join GFANZ via the UN-convened Net Zero Banking Alliance, Net Zero Asset Owners Alliance, and the Net Zero Asset Managers Initiative.

A starting point for many financial institutions has been to sign up to the Finance Principles of the Powering Past Coal Alliance (PPCA), a coalition of national and sub-national governments, businesses and organisations working to advance the transition from coal power generation to clean energy. According to the PPCA secretariat, financial institutions can help drive action and momentum in the lead up to COP26 by “urgently” moving capital away from coal.

Gradually, all banks will restrict their lending criteria and take climate change issues more and more into account”

Laurent Adoult, managing director, head of sustainable banking, FI and SSA Europe, Credit Agricole.

An ESG strategy is “deeply embedded in the overall strategy” of Credit Agricole, says Laurent Adoult, managing director, head of sustainable banking, FI and SSA Europe. “We were the first European bank to announce an exit from thermal coal financing, planned for EU and OECD countries by 2030 and the rest of the world by 2040,” he says.

The bank has a number of tools with which to achieve its net zero strategy, including 13 sector policies published since 2010, based on scientific data and research, and reviewed on a regular basis. “It is important that our strategy on carbon neutrality is science-based and that approach is key throughout the strategy,” he says. The policies send a clear message to the bank’s clients that there is no “going back” on its commitments to its net zero strategy. “Gradually, all banks will restrict their lending criteria and take climate change issues more and more into account,” he adds.

Credit Agricole CIB is also incentivising its clients via green, social and sustainability bonds. The bank’s Sustainable Banking is part of a consortium of banks that initiated the Green, Social and Sustainability Bond Principles, which promote the transparency and integrity of the market.

Institutions also need to decide on the metric, will it be absolute attributed emissions or rather an emissions intensity metric?”

Ilya Khaykin, partner, financial services, Oliver Wyman.

A “starting point” for financial institutions on climate change is to make a net-zero commitment and while many institutions have done this, many still have not, says Ilya Khaykin, partner in financial services at management consultants Oliver Wyman. “This is just the start however, because institutions then need to break that down into what it means not just in 2050 but over the medium term, e.g. 2030,” he says. “Here things start to become more real, because real action is needed to hit these targets for 2030.”

Institutions need to make a range of decisions regarding how these targets break down across business areas and activities, geographies and economic sectors, he adds. Net zero pathways for power generation are different from those for real estate and oil and gas. “Institutions also need to decide on the metric, will it be absolute attributed emissions or rather an emissions intensity metric? There are pros and cons behind each of these. One decision that is being hotly debated right now is about if and how capital markets activities should be scoped into the targets.”

Like Credit Agricole, TD Securities uses a science-based approach to set its GHG emissions targets. It has established an ESG Centre of Expertise to improve data measurement and analytics and joined the Partnership for Carbon Accounting Financials (PCAF) to support the development of carbon accounting methodologies for financial institutions globally, says West. The bank has established an interim target to achieve an absolute reduction in GHG emissions from its operations (both direct and indirect emissions) by 25% by 2025, relative to a 2019 baseline, she says.

Financial institutions should not “over state” the importance of their actions versus what governments can do, says Adoult. “Banks can and should act, but such action is not sufficient on its own. Energy transition is a global challenge and everyone – corporates, banks and governments – have a role to play. But government actions are clearly the ones that are the most powerful.”