81% of banks are disclosing information on progressive climate-related public policy. According to a report by Boston Common Asset Management, this is a slight increase from 71% in 2018.
However, this appears to have had little impact on commercial behaviour as green financing commitments remain dwarfed by investment in fossil fuels, and few banks are restricting their lending to 'less-than-green' clients.
In anticipation of Finextra and ResponsibleRisk’s inaugural SustainableFinance.Live Co-Creation Workshop, we spoke with Mark Line, director, Challenge Sustainability and co-author of comprehensive assessment of corporate sustainability to discuss which obstacles in sustainability reporting are hindering effective change.
Both the financial and technology sectors need to work harder to incorporate ‘climate risk’ into their decision-making processes, says Line. “The work of TCFD (Task Force on Climate-related Financial Disclosures) has been helpful in creating taxonomy for those risks and drawing them firmly to the attention of companies and investors.”
Line points to Mark Carney and the Bank of England for their leading role in the transition by requiring exploratory disclosures about climate risk in the next ‘stress test’.
Commentary from the BoE Governor explains that there are two paradoxes in managing the financial risks from climate change: “Once climate change becomes a clear and present danger to financial stability it may already be too late to stabilise the atmosphere,” and yet, “too rapid a move towards a low-carbon economy could materially damage financial stability.”
This is indicative of Line’s outlook that ‘Sustainable Finance’ is about transitioning financial decision-making to support taking a broader view over the longer term, and find an end to short termism.
The Sustainable Development Goals, framed around 17 goals and 169 targets describe a very broad-ranging agenda for change says Line, continuing: “I think it is fair to say that it’s been over four years since the Goals were published and we now need to see less prioritizing and more concrete action.
“I think the tension lies around how to measure progress and target setting. Most notably, how ambitious targets should be to make a meaningful contribution.”
The Boston Common report says that the global focus on sustainable finance commitments is encouraging and that “the green bond industry has grown from just $1 billion a decade ago to over $200 billion in 2019 alone, and regulators in the UK and the EU are working on green taxonomy frameworks.”
Line furthers: “these [green] bonds are specialist financial instruments that are set up to deliver specific social, environmental or broader economic (e.g. socio-economic) benefits.
“When bonds are created, a lot of effort is placed on carefully defining those benefits (use of proceeds) and how progress towards their delivery will be measured. The verification processes associated with bonds concentrate on performance data (that demonstrates those benefits are being delivered) and treasury data (the funds are being directed only towards projects aimed at relevant projects).”
By way of example, Line points to information disclosed by HSBC surrounding their green and sustainable bonds, where it is clear to see how the bank has defined the use of proceeds.
For example, they have committed to providing USD100 billion of financing and investments by 2025 to develop clean energy, lower-carbon technologies, and projects which will facilitate the delivery of the Paris Climate agreement and the UN SDGs.
This means playing a lead role in the development of financial products for customers advancing renewable energy and low-carbon business activities. The progress of which is also disclosed on their platform, showing that HSBC has facilitated USD36.7 billion in sustainable financing and investments since the commitment in 2017.
While this is promising, the BCA report flags that “What is concerning is that green financing commitments are still dwarfed by investment in fossil fuels. Critics have also argued that some of the big green finance commitments by banks do not represent new financing but merely re-allocations or rebranding of existing commitments.
“However, we have seen marked progress in this area since our last report. Over 84% of banks now use third party assessment or certification for green products, and over 80% disclose information on their low-carbon products and services.”
Disclosure of information may be improving, but the concern of consistency of reporting standards remains a thorny issue. Line suggests that “confidence will be improved if there were to be greater consensus over what should be reported, and how.”
“The three main players in setting standards are the Global Reporting Initiative, the SASB, and the Integrated Reporting Framework. There remains significant differences in the approaches proposed by each despite efforts to achieve convergence. While this remains to be the case, efforts to create a consistent and widely accepted approach will be undermined.”
Finextra Research and ResponsibleRisk focused on sustainable finance in commercial banking at the first SustainableFinance.Live Co-Creation Workshop on held Wednesday 4th December in London.
Register your interest for our upcoming events, 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).