Comment: Maarten Vleeschhouwer of the 2° Investing Initiative and Antoni Ballabriga of BBVA look at how banks are responding to the challenge to play a central role in achieving the Paris Agreement goals
In his speech to the High-Level UN Climate Change roundtable this week, Mark Carney, the Secretary-General’s Special Envoy on Climate Action and Finance, and formerly the Governor of the Bank of England, said that every financial sector needs to take climate into account.
Although the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), which he has championed, have until now been voluntary, he told world leaders that it is “unacceptable” for companies not to disclose the impact of their decisions on the climate.
During a UN PRI webinar, Carney went one further, saying climate disclosures should be reflected in company profit and loss statements.
Banks play a central role in the fight against climate change, through lending decisions and engagement with clients
There have recently been a series of promising signals from financial sector players that they are heeding Carney’s advice.
This month, in the run-up to Climate Week, a coalition of investor groups managing more than $100 trillion called for corporate reporting to reflect climate-related risks. On 14 September, the influential investor group Climate Action 100+ demanded that the world’s 161 dirtiest companies implement a “net-zero strategy” by 2050 or earlier. Four days earlier, for the first time, UBS made the landmark move of announcing it would make sustainable investments its preferred solution for all clients investing globally.
Recently, many of these headlines have been driven by investor coalitions and asset managers, rather than the banking sector. If we are to achieve the Paris Agreement goals, however, it is crucial to involve the banking sector more deeply in these efforts. After all, banks play a central role in the fight against climate change, through the lending decisions they make and the engagement they carry out with clients. Without equipping them with the tools they need to measure and manage the climate implications of their lending decisions, we will be missing crucial players on the road to Paris.
Already, a number of forward-thinking banks have recognised this fact and taken action. For instance, at COP24 in 2018, the five Katowice Commitment banks (BBVA, BNP Paribas, ING, Société Générale, and Standard Chartered) made a landmark pledge to measure the climate alignment of their lending portfolios, and to explore ways to progressively steer financial flows through their core lending towards the Paris Agreement goals.
The Katowice Commitment contributed to inspiring the Collective Commitment to Climate Action, signed by 34 banks (representing US$13 trillion in loans) willing to commit to aligning their business with the Paris Agreement, as part of the UNEP-FI Principles for Responsible Banking. Both pledges were announced in September 2019 in New York at the UN Secretary-General’s Climate Action Summit.
To achieve these commitments, the Katowice signatories promised to contribute to developing open-source methodologies and tools that could help measure the alignment of lending portfolios with climate scenarios. On 15 September, marking a culmination of these efforts, 2° Investing Initiative (2DII) launched PACTA for Banks, a free, open-source toolkit for banks to measure the climate alignment of their loan books. Since then, the Katowice signatories have also released an application paper that aims to help other banks better understand and apply the PACTA methodology.
Until now, the banking industry has been unable to take advantage of climate-scenario analysis,
Why does this matter? For one thing, until now, the banking industry was unable to take advantage of climate-scenario analysis, which was mostly used for assessing investors’ portfolios. Instead, banks focused mainly on questions such as sectoral sustainability, setting lending targets to pre-defined “green” sectors, or limiting lending to fossil fuel projects. Much of this was due to limited environmental data as well as the technical complexity of processing large loan books.
Now, with the advent of new data collection techniques, more sophisticated, granular data, as well as text-matching software, 2DII and its research partners have laid the groundwork for banks to meaningfully assess the alignment of their corporate lending portfolios with climate scenarios across a set of key climate-relevant sectors. Over the course of the past two years, in order to enhance the methodology, 2DII has led a road-testing process in partnership with the five Katowice Banks, together with 12 other banks from Europe, North and South America, and inputs from NGOs and academic experts.
Thanks to the PACTA for Banks toolkit, banks can get a granular view of the alignment of their corporate loan books by sector and related technologies, at both the corporate client and portfolio level. They can use this information to help steer their lending in line with climate scenarios; to inform their decisions around climate target-setting; and to gain insights into their engagement with clients on their respective climate actions. The toolkit can also help banks identify their exposure to transition risks associated with a disruptive shift to a low-carbon economy.
While the Katowice Commitment signatories and other road testers have taken a primary role in these efforts, there is no doubt that a wide swathe of the banking sector will need to mobilise if we are to keep global warming to well below 2˚C. Only then will we start to see a gradual shift from headlines of wildfires, droughts, and flooding – to stories of measurement, commitments, and actions from global financial players.
Antoni Ballabriga is Global Head of Responsible Business at BBVA, co-chair of the Global Steering Committee at UNEP FI (United Nations Environmental Program for Financial Institutions) and chair of the Sustainable Finance Working Group at EBF (European Banking Federation). Maarten Vleeschhouwer is head of PACTA at 2° Investing Initiative.