BANKING ON A LOW-CARBON FUTURE

A Ranking of the 15 Largest European Banks’ Responses to Climate Change

Banks finance some of the most climate-destructive practices. As a result, they are major players in moving the economy away from fossil fuels. In view of this and two years on from the Paris Agreement, we’ve ranked Europe’s 15 largest banks with the aim of improving their policies and practices on climate change.

This is the first comprehensive report to capture the current state of the European banking sector’s response to climate-related risk and the low-carbon transition.

Who are the leaders and laggards on managing climate-related risks and opportunities?

This report builds on ShareAction’s earlier work to present a comprehensive ranking of European banks based on their policies and performance across four key themes:

  1. Climate-related risk assessment and management
  2. Low-carbon products and services
  3. Public policy engagement and collaboration with other actors on climate change
  4. Governance structures and strategy on climate-related risks and opportunities

LEADER

BNP Paribas (France): 107 / 162

CHALLENGERS

UBS (Switzerland): 94 / 162
HSBC Holdings (UK): 92.5 / 162
Crédit Agricole (France): 92 / 162
Societe Generale (France): 89 / 162
ING (Netherlands): 82.5 / 162

LEARNERS

Deutsche Bank (Germany): 61.5 / 162
Barclays (UK): 58 / 162
Santander (Spain): 56.5 / 162
Credit Suisse Group (Switzerland): 55.5 / 162
RBS (UK): 54 / 162
BBVA (Spain): 52.5 / 162
Standard Chartered (UK): 52.5 / 162

BYSTANDERS

UniCredit (Italy): 43 / 162
Lloyds Banking Group (UK): 37 / 162

Investors should positively note that all of the surveyed banks have considered climate change on some level, and that this topic is now firmly on the agenda. However rudimentary, most banks have started carrying out climate-related risk assessments and introduced policies for risk mitigation. It is also encouraging that all of the surveyed banks decided to actively participate in the process and responded to our survey.

However, this survey also shows that there are still some considerable weaknesses in the ways banks have responded to climate change. It will be a concern to investors that individual banks’ exposures to climate-related risks are not yet fully quantifiable, and that policies covering the sectors most exposed to those risks, as well as engagement strategies with clients, are in most cases misaligned with the target of limiting global temperature rises to <2°C. Nevertheless, the fact that all banks have started considering climate change indicates that there is a willingness in the sector to address climate-related issue. Hence, 2018 appears to be a good moment for shareholders to engage in climate-related discussions with banks.

What did the survey research reveal?

1.

European banks are aware of climate-related risks and opportunities

All 15 surveyed banks have considered climate-related risks and opportunities and adopted policies, introduced processes and launched products as a result. The 100% response rate to the survey also provides an indication that banks are becoming increasingly aware of the issue.

2.

BNP Paribas is the clear leader in Europe

BNP Paribas is the clear leader in the field, followed by a group of ‘challengers’ including UBS, HSBC, Crédit Agricole, Societe Generale and ING. Lloyds Banking Group and UniCredit appear to have so far been bystanders on climate-related issues.

3.

French banks generally outperform their peers

All three French banks surveyed score well compared to their European peers. Our research shows this seems to be related to the introduction of legislative and regulatory measures, including Article 173 in France. This has important implications for policymakers and regulators in other countries.

4.

European banks are acting on the TCFD recommendations

13 out of 15 banks have confirmed their intention to implement the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. However, there are clear differences in the interpretation of these recommendations and TCFD ‘readiness’. ShareAction expects a number of banks to publish more comprehensive approaches to the TCFD recommendations during 2018 and encourages banks’ shareholders to monitor these and engage in follow-up discussions as necessary.

5.

European banks underperform on managing climate-related risks and opportunities

The surveyed banks generally perform well on questions related to public policy engagements, collaboration, governance and climate strategies (sections 3 and 4). Most banks give weaker responses on the more complicated areas of risk assessments and management and the development of low-carbon products and services (sections 1 and 2). This should be a red flag to investors, who will be most interested in banks’ actual exposure to climate-related risks, how these are managed and how this will affect their own investment portfolios.

6.

Policies to avoid or limit exposure to negative climate impacts do not go far enough

14 of the 15 banks have adopted policies to avoid or limit exposure to activities with significant negative climate impacts, such as thermal coal extraction. These policies vary in nature and still leave many banks with significant exposures to climate-related liabilities and risks. This will be a concern for institutional investors, who should ensure banks’ policies are aligned with the climate targets set in the Paris Agreement of limiting global average temperature rises to <2°C.

7.

European banks’ engagement with clients exposed to climate risks lacks teeth

13 of the 15 banks have policies on engaging with clients in sectors most exposed to climate-related risks. However, most of those policies do not set clear objectives and timelines or detail what the consequences are if clients fall short. It is important that shareholders request these policies are improved and information about clients’ transition plans is included in loan covenants. This will improve the banks’ ability to manage climate-related risks appropriately when lending to sectors with high-carbon activities or highly exposed to climate-related risks.

8.

The supply and choice of low-carbon products and services is expanding rapidly

All banks have developed a range of products that help clients meet the challenges and opportunities caused by changes in technology, regulation and consumer behaviour driven by climate change. The supply and choice of low-carbon products and services is expanding rapidly. Institutional investors should encourage banks to continue with this positive trend for innovation and scale up the current range of offerings.

9.

All European banks are engaging with external actors on the low-carbon transition

All surveyed banks are actively engaging with external actors on climate-related issues, including policymakers, trade associations and credit rating agencies. Banks’ shareholders are encouraged to do the same to ensure the right policies and regulations are in place for a smooth low-carbon transition across the European banking sector.

Key recommendations & next steps

Recommendations for institutional investors

1.

This report has identified that there are significant weaknesses in the European banking sector’s approach to climate-related risk assessment and management. Shareholders should prioritise engagement and discussion with banks on this topic and request banks:

  1. Place increased emphasis on developing methodologies for <2°C, 2°C and 2°C+ scenario analysis;
  2. Disclose the percentage of high-carbon assets relative to total assets and what the objectives are for decreasing this;
  3. Strengthen policies to avoid or limit exposure to activities and companies with significant negative climate impacts, in line with <2°C scenarios, and;
  4. Introduce more stringent <2°C engagement policies reflected in loan covenants to guide dialogues with clients active in sectors highly exposed to climate-related risks.

2.

At those banks where significant progress has been or is being made on climate-related risk assessments and management, investors might also ask about issues linked to low-carbon products and services, policy engagements and collaboration with other actors, as well as governance structures and climate strategies.

Recommendations for policymakers and regulators

1.

Policymakers and regulators across Europe must take note of the recent developments in France and their impacts on the French banking sector. It is recommended that they review the effects of Article 173 and assess the potential applicability in other countries and/or at EU level.

2.

Another route to promote the increased disclosure requirements that many banks are supportive of could be to make the TCFD recommendations mandatory.

3.

Besides the need for increased disclosure requirements, this survey has also brought up a range of other policy and regulatory suggestions supported by banks, for example:

  1. several banks expressed support for a timely introduction of carbon pricing. Policymakers and regulators ought to assess new ways of taxing or trading carbon or make current measures more effective;
  2. There has also been considerable support for incentivising green product development. One potential way of achieving this could be by adjusting capital requirements. Regulators are encouraged to collect evidence on whether certain types of green assets present lower risks than brown assets and vice-versa, and consider the effect this might have on capital requirements.
Colette St-OngeA Ranking of the 15 Largest European Banks’ Responses to Climate Change