The ‘Banking on a Low-Carbon Future: Finance in a Time of Climate Crisis’ report highlights the Intergovernmental Panel on Climate Change’s (IPCC) claim that global emissions are not expected to peak by 2030 and the time for incremental change is over: a true transformation is required by the financial services sector.

Surveying 58 global banks and focusing on the governance aspects outlined by the Taskforce on Climate-related Financial Disclosures (TCFD), Boston Common states that we are now 12 months before Glasgow hosts COP26 in November 2020, where countries will be encouraged to up the ante on the reduction pledges previously made in Paris in 2015.

Implementing group-wide climate strategies

While delays in tackling climate change could cost companies up to $1.2 trillion over the next 15 years, the report also reveals that a $1.8 trillion investment in climate adaptation by 2030 could yield $7.1 trillion in benefits.

Further to this, there have been a total of 82 new risk management and climate strategy policies or initiatives joined, but “new tools have not accelerated the rate of decarbonizing lending and investment portfolios, nor broadened the strategic adoption of low-carbon and green products and services.”

Boston Common advises banks to “adopt group-wide climate strategies overseen by the board, with robust implementation throughout the organization from the C-suite down to front-line managers.” To date, there has not been extensive progress in this area and a third of the 58 banks surveyed are yet to do so.

However, 95% of European banks and 100% of the Australian banks have in fact adopted a group-wide strategy, followed closely behind by US and Canadian banks. Although, only 60% of Japanese banks have and this trend is seen across the emerging markets.

Decarbonising balance sheets

Financing priorities and procedures must be changed, and climate strategies must include a process for decarbonising balance sheets “including clear timelines for restrictions and phase-outs of financing for fossil fuels and deforestation.”

Despite broader adoption of TCFD guidance, risk assessment and scenario tools, the report explores how “green financing commitments are still dwarfed by investment in fossil fuels, and few banks are restricting lending to high-carbon clients or those involved in deforestation.

Shareholders need to aware that they own the residual risks of all loans and in order to remain successful, corporate policies need to be “future-appropriate.”

The report continues: “Fossil fuel producers and high-carbon users will become worse credit risks as their business models become obsolete; so lending to them embeds worsening credit risk into bank balance sheets, setting up for high levels of non-performing assets and defaults.”

Setting explicit sustainable finance targets

In summary, a concerted effort is required by banks to increase and promote low-carbon products and services in line with their overall climate strategy. Only 55% of all banks surveyed have already done so, a slight increase from 46% in 2018.

2020 should be considered a ‘year of action’ and banks must commit to focusing on decarbonisation goals and climate solutions, in alignment with the Paris Accord. Lauren Compere of Boston Common Asset Management says: “The scale of the climate crisis demands a more radical transformation of the banking sector.

“Our findings indicate a systematic reluctance by banks to demand higher standards from high carbon sector clients, despite the fact that doing so could vastly reduce bank risk and accelerate action on climate change.”

Finextra Research and ResponsibleRisk will be focusing on sustainable finance in commercial banking at the first SustainableFinance.Live Co-Creation Workshop on Wednesday 4th December at 6 Alie Street in London.

Register your interest here for our inaugural event, where you can discuss what is driving the demand for sustainability and why companies are struggling to meet the benchmark set by the UN General Assembly’s Sustainable Development Goals (SDGs).