A shift is happening in the banking world. During just the past month, two new reports were released that were notable not just for their recommendations urging banks to get serious about implementing their commitments to ending financing of climate pollution and shifting to a clean economy, but for who produced the reports – some of the biggest names in the banking industry.
A Practitioner's Guide for Banks, released in late October by the Sustainable Markets Initiative (SMI), and The Good Transition Plan, published shortly thereafter by the Climate Safe Lending Network (CSL), provide practical, actionable steps for banks to create effective climate transition plans so that they can deliver on their net zero commitments of shifting their portfolios to a clean energy future by 2050. And, each of these reports has the support of the banks themselves. ABN AMRO and Amalgamated Bank are founding members of the Climate Safe Lending Network. The report from the Sustainable Markets Initiative was developed by the organization’s Financial Services Taskforce, which includes Bank of America, Barclays, BNP Paribas, Citi, Coutts, Credit Suisse, HSBC, JPMorgan Chase, Lloyds Banking Group, Macquarie, NatWest, and Standard Chartered.
Ceres and other groups have been making similar recommendations for some time — look no further than our 2020 transition risk report and recent physical risk report, both of which make clear the escalating risks banks face from climate change and the measures they need to take to mitigate the financial and societal impacts of those risks.
However, public reports developed by the banks, calling upon their colleagues and peers to act, are different. They underscore the growing consensus from all corners — civil society, the corporate world, investors, and, increasingly, regulators — about what is required from banks and their clients in addressing the risks of the climate crisis and the opportunities of the clean energy transition. Concerted action, starting with banks’ strategic plans for shifting their capital allocation and engaging with their clients, is critical to achieve the pace and scale of the economic and societal transformation needed to limit global GHG emissions to a level consistent with no more than 1.5°C temperature rise.
So what do these two reports call for the banking industry to do? Among The Climate Safe Lending Networks’ The Good Transition Plan report’s key calls to action are recommendations that:
- Scenarios should reflect a climate-safe world
- Set interim 2030 targets for each covered sector
- Anchor the highest-level ambitions in a strategy development process by reaching for 2030
- Offer pricing structures to incentivize sustainability and climate goals
- Integrate broader societal and environmental factors into strategy development
- Consider adaptation, resilience, and the needs of vulnerable communities
- Implement a near-term end (2022) to all expansion and exploration of fossil fuels and deforestation
- Assess legacy fossil fuel and deforestation assets and create reduction pathways
- Analyze the systemic impacts of the bank’s climate decisions on the wider market
- Review risk appetite policy to support climate innovations
The Sustainable Markets Initiative’s A Practitioner's Guide For Banks, meantime, includes key recommendations that call on banks to:
- Choose science-aligned net zero scenarios that limit warming to 1.5°C with no- or low-overshoot
- Whether setting absolute emissions or emissions intensity targets, banks should set targets that are consistent with the absolute emissions reductions implied by science-based pathways
- When measuring financed emissions, banks should not account for credits they have bought. They may choose to buy credits to accelerate the global net zero transition, but these should be disclosed separately
- Support the development of standardized definitions of 'transition' and 'sustainable' to enable further investment
- Build strategy to adapt engagement based on customer size, sector, geography and transition maturity
- Design processes to balance accelerating the transition with supporting local economies and ecosystems to help ensure a ‘just transition’
Critical and challenging work lies ahead for the sector. There are complex technical hurdles, such as gathering emissions data from thousands of disparate companies, conducting the forward-looking scenario analysis necessary to fully understand climate-related risks and opportunities, and setting robust and time-bound goals for the sectors with which they do business.
Perhaps even more difficult, banks will have to marshal the will to not only engage their clients on the task of transforming their businesses, but to make hard decisions about no longer doing business with those clients that are unwilling to make the fundamental changes required.
The consensus that we are starting to see take shape is hopefully the beginning of an inflection point. Banks need to begin moving past questions about how to act and shift towards action on the essential and challenging tasks ahead.
KEYWORDS: banking, Climate Risk, CERES