Long reads

The challenges of authentic sustainability buffet the world’s banks

Scott Hamilton

Scott Hamilton

Contributing Editor, Finextra Research

Critics say carbon commitments don’t match lending policies.

There are stiff breezes swirling around corporate sustainability, and it’s starting to erode the tough armour of larger financial institutions across the globe. They’re trying to showcase their dedication to diversity, equity, and inclusion, and they’re actively managing all sorts of risk related to climate change. And a growing list of critics say that many banks just aren’t getting it all right, or getting it at all, when it comes to environmental and social challenges.

One of the most prominent of sustainability risk factors for this sector is banking the ‘wrong’ industries and companies, aka customers offering high carbon emitting or excessively, consistently polluting, products, many made of nonrenewable materials. Loans and lines of credit to such ‘dirty’ enterprises, most prominently those doing business in and around the fossil fuel industry (including petroleum’s most famous non-fuel offshoots: plastics) have become lightning rods for criticism by sustainable investment management advisors, environmental watchdog groups, and neighbourhood-to-national-level climate change activists all over the globe.

So, what are the chances of sustainability program success for banks – meaning they maintain positive momentum in the court of public and investor opinion, or at least not face negative reputational risk - especially the larger, multinational variety? Some major lenders seem to be faced with a ‘damned if we do – or don’t’ scenario when it comes to confronting climate change in the world and on their own balance sheets as well. Whether one agrees this is deserved or not, the answer from industry experts on all sides of this question is, ‘That depends’.

A recent Accenture report, Rising to the challenge of net zero banking, explains why the answer is so nebulous for many financial institutions. And EY’s most recent industry risk management survey provides some more statistics to illustrate why this is such a challenge for most financial services organisations responding.

While only 49% of Chief Revenue Officers (CROs) feel climate change risk is a top concern for their firms in the next 12 months, according to EY’s 11th annual global bank risk management survey, conducted in concert with Institute of International Finance, “Climate is the most important emerging risk over the next five years for 91% of Chief Revenue Officers. 96% said it was the number one concern of their board of directors.”

Per Accenture2, “So far, almost 60% of the world’s leading banks have made public commitments to reach net zero carbon emissions. Moreover, Accenture research found that many banks are eager to go a step further. They want to become stewards of the global transition to a net zero economy and guide their corporate customers as they decarbonise. This role would enable banks to extend and strengthen their businesses while also playing a pivotal role in preserving the planet for future generations.”

The question for many banks in 2023 and beyond is can they, or will they, be willing to walk away from financing fossil fuel companies and other firms clearly on the ‘wrong side’ of mounting public opinion and the views of many sustainable (and influential) investment management advisors? What are some of the risks of acting, or not acting, to expand and clarify ESG programs and reporting in the age of advancing expectations and ‘blame their bank’ cries from an ever-younger global marketplace?

To understand just how vociferous the scrutiny on banks (and some of their corporate customers) has become, consider this comment about financial institutions that don’t, as they might call it – ‘walk the talk’ of sustainability as judged by their lending practices. It’s from Rainforest Action Network’s (RAN) publication, Banking on Climate Chaos, its “fossil fuel finance report”3 published in 2022.

“These banks may tout their commitments to helping their clients transition, and yet the 60 banks profiled in this report funneled $185.5 billion just last year into the 100 companies doing the most to expand the fossil fuel sector, such as Saudi Aramco and ExxonMobil — even when carbon budgets make clear that we cannot afford any new coal, gas, or oil supply or infrastructure.”

The RAN shares its ‘Dirty Dozen’ of banks financing companies from the sector in a League Table across “2,700 subsidiaries of 1,635 parent companies across the fossil fuel life cycle”. At the top of the list are five of America’s largest banks, plus three Canadian, two Japanese, one British, and one French-headquartered institutions.

In future articles in this series, we will share specific examples of policies, actions, and commentary from banks, industry analysts, and organisations active in the climate change and sustainability debate.

Comments: (1)

Richard Peers
Richard Peers - ResponsibleRisk Ltd - London 22 March, 2023, 12:57Be the first to give this comment the thumbs up 0 likes

Thanks for the great article Scott.  The key is transition and stewardship in my opinion.  Selecting ESG in a portfolio is a choice for the buyer.  Measuring ESG prudential risk should be mandatory for the central banks.  Then how do we get from brown to green comes down to transition pathways, that are rigorously managed via stewardship.  If fossil fuel company A is transitioning at speed vs FF company X that is a laggard then we can sort the wheat from the chaff.