Announcements are coming thick and fast from big banks about new sustainability policies, targets and teams. Banks clearly grasp that this is important, not only to their public reputations, but because it will be a central theme of economic life for the foreseeable future.
Society, which includes all companies, will have to transition to a clean, low carbon model. Tragically, we have left it too late to avoid severe climate change, but as natural disasters and human suffering mount, the imperative to act fast will be even clearer.
Long ago, banks might have been passive partners in economic change. Not any more. Their prominence — bordering on pre-eminence — in north American and European business life means society and investors expect them to be more intelligent and forward-looking than the average corporation; to be leaders and guides, not followers.
Most of the large banks enjoy and encourage this perception of their role.
Eye-catching initiatives
Last week Deutsche Bank set a target of arranging €200bn of sustainable financing by 2025. “We are driven by a very strong conviction to help shape the global change to a sustainable, climate-neutral and social economy,” said its CEO Christian Sewing in a statement.
On Tuesday Citigroup’s investment bank put two of its most senior executives in charge of a new sustainability and corporate transitions group.
“Given Citi’s longstanding leadership in sustainability, and our expertise in green finance, we wish to leverage our collective strengths across the firm to deliver a unique proposition for our clients,” the investment bank heads said in an internal memo.
These initiatives are no doubt sincere and useful. But how can outside stakeholders really tell what banks are doing — and whether they are doing enough?
Deutsche says it will use transparent criteria to define sustainable financing. But this class of activity, which it has promised to increase, will still only be a small part of its overall business.
Bank of America vowed last year, in its fourth such pledge, to “mobilise” $300bn of capital for low carbon, sustainable business by 2030. It has a history of beating its targets, so if it reaches this one in 2025, it will have done $50bn a year.
Last year BofA's share of the bonds and loans it was bookrunner for totalled $780bn, according to Dealogic. If for the sake of argument $50bn of that was low carbon and sustainable, what about the $730bn that was not?
Is there any way of knowing whether the beneficial green activities BofA financed outweighed the environmental damage inflicted by its other clients?
The matter is of interest to public opinion, which expects banks to play an enlightened and leading role. It is also keenly relevant to investors, especially those trying to invest responsibly.
Financial firms make up 19% of the FTSE4Good index, one of the most widely followed benchmarks for investors conscious of environmental, social and governance (ESG) issues — or 33% if you follow the emerging market version of the index.
The FTSE4Good and other ESG analysts such as MSCI and Sustainalytics use a variety of inputs — with varying degrees of transparency — to determine their rankings and ratings of banks.
But since the primary information banks give out about their sustainability is patchy and hard to compare, it is doubtful whether these information providers can shed much light.
How green are my assets?
Several banks including HSBC, BofA and Deutsche Bank claim to be carbon-neutral in their operations such as offices and travel, and these assertions can to some extent be verified.
But a bank’s major influence on the world lies in the clients and activities it finances. Unlike an electricity supplier or insurance company, which provide their utility-like services to pretty much any organisation that can afford to pay, banks are expected to exercise judgement — to understand and evaluate the business model of each client. They supply not just money but advice.
If banks are living up to their claims and “shaping” the low carbon transition, their entire financing activity ought to be tending towards carbon neutrality.
Society and investors therefore want to know how green banks’ balance sheets and financing activities are. They need objective metrics that can be applied to banks in the same way, to enable a comparison.
The highest profile corporate sustainability drive at present is the Taskforce on Climate-Related Financial Disclosures. Its A-list backers Mark Carney, former Bank of England governor, and media entrepreneur Michael Bloomberg have helped persuade most of the most powerful and influential companies, including banks, to sign up.
But while the TCFD’s aim is laudable — all companies should disclose a strategy for how they will deal with climate change — this can only be part of the answer.
The TCFD is a set of principles, not a technical manual. It does not prescribe standardised numerical reporting. In the absence of hard and fast rules, disclosures may be influenced by unhelpful incentives.
Banks are unlikely to disclose that they face much more climate risk than their competitors — nor will they want to be seen to minimise the risk, for fear of appearing complacent. The logic of the system may be to encourage herding, not the “decision-useful information” the TCFD is aiming for.
Metrics needed
The cure for this is objective standards. Initiatives such as the Sustainability Accounting Standards Board are making progress in this direction.
The Science-Based Targets Initiative is working with 50 banks to produce a methodology for how banks can set targets to reduce their financed emissions at a rate consistent with meeting the Paris Agreement climate commitments.
But for the time being, there is no reliably comparable source for banks’ ‘Scope 3’ carbon emissions — those of the clients they finance — let alone for other sustainability impacts.
People and investors wanting to compare banks’ sustainability are better advised to turn to external agents such as NGOs, which stand outside the banking sector and are not paid by it.
ShareAction, the London-based responsible investment NGO, has twice ranked the top 20 European listed banks on their responses to climate change.
The most recent report, based on information to December 2019, was published in April.
Its approach is based on the TCFD recommendations for banks, but has the advantage of using a standardised questionnaire. ShareAction considers the responses and scores the banks, giving 35% of the points for how exposed they are to high carbon assets and how they manage this risk; 35% for activities with low carbon assets; 15% for their public advocacy; and 15% for governance, strategy and implementation.
In ShareAction’s estimation, BNP Paribas comes top, with a 63% score. Achievements highlighted included it having consulted stakeholders thoroughly on their priorities, and completely excluded financing unconventional oil and gas such as tar sands and Arctic drilling.
Lloyds Bank, which had been last in the group when ShareAction first did the study in 2017, has leapt to second place. The laggards are Intesa Sanpaolo and Danske Bank.
Investors reading this report will have the advantage of 130 pages of clear and objective analysis, which is not bewilderingly over-technical.
Opening up
However, this is not the only way to look at the problem. Reaching more pointedly towards quantifying banks’ financed carbon emissions is the Platform on Carbon Accounting Financials.
It aims to produce a standardised, open methodology for banks to report their carbon footprints.
Set up by Dutch financial institutions in 2015, the initiative now has 60 adherents with $4.3tr of assets. Among commercial banks, the large ones involved are ABN Amro, KBC, Rabobank and the villain of the ShareAction report — Danske Bank, which committed this month.
ABN has reported its financed CO2 emissions for 2018, for three business lines plus its own facilities. Mortgages bulk large: retail banking is 78.5% of the total. Corporate lending is 13.7% and commercial property clients 7.7%. Facilities are less than 0.1%.
The total emissions of 3.9m tonnes are equivalent to 2.4% of those of the Netherlands.
The banks following PCAF are minnows in fossil fuel financing, however. The most accessible guide to the big fish is the Rainforest Action Network’s league table and report, Banking on Fossil Fuels.
It does not attempt to provide carbon footprints, but simply calculates how much financing banks have been giving to fossil fuel companies. You can drill down to types of activity, including expanding fossil fuels, tar sands, coal mining and coal power (Barclays was sixth on the last issue in 2019, for example, with $1.6bn of financing).
Top of most of the oil and gas lists is JP Morgan, which provided $65bn of financing last year.
More concerning is how many of the big banks generally regarded as sustainability leaders are high up on the list — and the lack of any apparent downward trend.
Wells Fargo, Citigroup and Bank of America have the three top spots behind JP Morgan. Barclays is the biggest financier in Europe — one reason why ShareAction singled it out for a shareholder resolution, which won support from 24% of investors at its annual general meeting on May 7, calling on it to set targets to phase out fossil financing.
But at 13th, 22nd and 24th in RAN’s league table are BNP Paribas, Société Générale and Crédit Agricole.
BNPP’s fossil financing rose 72% in 2019, to $30.6bn, dwarfing its usual $17bn-$18bn over the years since the Paris Agreement. SG’s rose slightly too and the four year trend at CA is up.
Behind the times
Banks may howl that these facts and figures do not tell the whole story of their efforts on sustainability.
But in the absence of more detailed, verifiable evidence of progress from the banks, what else are the public and investors to use?
Banks are fond of talking about how they “educate” green bond issuers in matters such as impact reporting on how the bond proceeds are used. Yet banks have not used the publicly available data many companies provide on their carbon footprints to calculate and disclose how much of this they are financing.
UK-listed companies, for example, have been required to disclose their greenhouse gas emissions since 2013.
If banks really aspire to be leading the economy towards a sustainable future with net zero emissions, they ought to be decarbonising their financing activity not just at the same rate as the economy as a whole — but faster.
They could start by adopting, immediately, a standardised benchmark for carbon accounting such as the PCAF, or even the RAN league table — even if it is imperfect.
The world cannot wait for banks to spend three years in working groups to devise a model as complicated as Basel 3. Nor is it asking for a 100 page sustainability report. It wants a page or two of data — or even a single number.
For the time being, it is hard to avoid the conclusion that most banks — even those that talk a good game on climate and sustainability — are not leading the transition, but holding it back.