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November 05, 2015

Banks Still Failing to Incorporate Climate Risks in Lending
    by Robert Kropp

A year after Boston Common Asset Management organized an investor initiative, major global banks continue to fail to account for greenhouse gas emissions in their lending and underwriting portfolios. -- It's been more than a year since Boston Common Asset Management published a report on the financial sector's response to the climate change crisis. While it may not seem readily apparent how an industry with relatively low emissions from its own operations could be at risk, such a perspective fails to take into account the importance of Scope 3 emissions; specifically, in the case of banks, the emissions from their lending and underwriting portfolios.

“The banking industry has not successfully integrated climate change risk into its long-term strategic planning or understood the implications of this game-changing phenomenon for its business operations,” last year's report stated. As a result of its findings, Boston Common undertook the organization of an investor initiative that has since grown to include 80 global institutional investors with $500 billion in assets under management.

"Shareholders should urge banks to be more transparent about the climate risks embedded in their business models, and call for comprehensive action," Lauren Compere, Director of Shareholder Engagement at Boston Common, said at the time.

With the COP21 climate change conference rapidly approaching, Boston Common recently published a
foll owup report, which examines the management of climate-related risks by 61 of the world's largest banks. Unfortunately for the pace of transition to a low-carbon economy, progress on the issue by the banks has been insufficient; “There remains a huge divide between banks’ current practices and the financial sector’s potential to support the transition to a low-carbon future,” Boston Common noted.

“Nevertheless,” the report states, “banks worldwide are clearly making efforts to rebalance their portfolios to reduce exposure to energy-intensive sectors, such as coal, in favor of energy efficiency or renewable energy.” Encouraging trends include widespread support for a framework with which to analyze carbon footprints to include Scope 3 emissions, although none of the banks surveyed currently disclose a comprehensive analysis of emissions.

“Overall,” the report continues, “banks provided limited quantitative disclosure regarding their risk analysis, financing of energy-intensive sectors, and performance aspirations.” Without such disclosures, of course, investors are at a disadvantage when attempting to comprehend banks' commitments to a low-carbon transition.

Slightly more than a quarter of banks surveyed performed above average in the area of risk assessment, according to the report, and more than two-thirds were above average in the category of opportunities. However, as the report points out, “Given limited corporate disclosure, investors are unable to determine to what degree a bank is investing in energy solutions compared to energy-intensive industries.”

In the category of climate policy itself, more than 90% of banks performed at average or below-average levels.

The report, as well as the investor coalition itself, urged banks to take the following steps:
1. Establish long-term, comprehensive climate strategies;
2. measure and disclose the total carbon footprint of financing activities ;
3. disclose quantitative figures and targets supporting energy efficiency and renewable energy financing as a proportion of overall lending and investments; and
4. conduct regular environmental stress tests.

“The analysis shows a worrying lack of a strategic, long-term approach to climate risk across many of our leading banks,” Compere of Boston Common stated. “We believe banks are not adequately measuring, managing and disclosing these risks.”

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