Blog 12.09.23

Big Banks, Financing and Climate Change

Is it any surprise that big banks move a little like the Titanic? Veering away from investments that contribute to climate change has been glacial, even as the regulatory tide swells toward carbon reductions and accountability.

Big banks have a considerable stake in climate outcomes. They will influence and be influenced by extreme global changes in our atmosphere and ocean. The top influencers include what’s known as the Global Systemically Important Banks (G-SIBs), thirty institutions whose failure poses disproportionate risks to the global economy. The list consists of heavyweights such as Deutsche Bank, the Bank of China and Bank of America.

To say that they hold a lot of eggs in their baskets is an understatement. At the end of 2021, the G-SIB assets represented nearly 63% of global banking assets. The global financial crisis of 2008 led to greater scrutiny and reforms of these mega-banks.

Their headway so far in addressing the climate crisis lands them in lukewarm waters, at best. According to a 2023 international discussion paper[i] published by the Federal Reserve, one major shortcoming of G-SIBs is their slow divestment from climate-driving enterprises. The paper isn’t the only one to bear bad news of this kind. In 2022, InfluenceMap found a stark disconnect between the climate commitments made by many large financial institutions and their investment activities. And another more recent assessment of big banks found no disclosures by more than two dozen institutions of their share of total finance toward climate solutions for the year ending June 2023.

Of major concern is the banks’ shortcomings to reign in “financed emissions,” investments in sectors, companies or projects that are big greenhouse gas (GHG) emitters, like energy. For G-SIBs, financed emissions represent their best opportunity for the most significant reductions in GHGs.

“Despite the rapid growth in green financing in recent years, fossil fuel financing remains strong,” the Fed discussion paper states. “Furthermore, the current level of green financing remains below what is needed for the transition to net-zero, as estimated by international bodies.”

Many international bodies, like the International Renewable Energy Agency (IRENA), have calculated the amount needed in green financing between now and 2050 to achieve a net-zero economy, with estimates ranging from $90 trillion to $130 trillion. However, in the Fed analysis, current commitments only reach $33.6 trillion, well below target.

To be fair, the G-SIBs are developing “climate action plans,” which lay the groundwork to reduce direct and indirect emissions. Big banks are taking into account climate issues and making public disclosures about those plans, though progress and strategies have been uneven across regions, according to the Fed paper.

G-SIBs are also beginning to measure their climate risks to understand what could disrupt a bank’s ability to do business. They’re assessing both acute risks, such as hurricanes, and chronic risks, such as rising temperatures, to prepare for climate-related events. Addressing such risks could lessen financial hardships, like supply chain disruptions and infrastructure damage from storms, that can have consequences on credit and markets.

New initiatives are helping out, too. For instance, the UN Environment Programme Finance Initiative started the Principles of Responsible Banking in 2019, and since then, over 300 banks have signed on, representing almost half of the global banking industry. Participants in the program join a cohort of other banks in the same boat and pledge to publish self-assessments about their environmental impacts and establish measurable targets.

There are other lifeboats on the horizon. The UN convenes the industry-led Net Zero Banking Alliance, which develops peer education to members to design, set and achieve credible science-based net zero targets; another group, the Partnership for Carbon Accounting Financials, has also developed its own approach to help banks with financial emissions reporting. With these groups and pressure from regulatory bodies, investors and consumers, big banks may make greater strides ¾ and move beyond assessing the impact of climate change on their balance sheets to addressing the impact of their activities on the climate.

[i] International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors.

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