SIX WAYS TO FIX SUSTAINABLE FINANCE
|Introduction: Sustainable finance's biggest problems|
|1. Join the PRB|
|2. Mandate TCFD|
|3. Standardize climate risk measurements|
|4. Develop transition finance|
|5. Target deforestation reduction|
|6. Incentivize green finance|
Almost every banker that Euromoney spoke to for our analysis of what is needed to make sustainable finance work mentioned initiative fatigue.
“What frustrates me most is the enormous number of initiatives going on – many of which are window dressing or a duplicating of efforts,” says one sustainable finance head, echoing the opinion of many of his peers.
To what extent the pledges are working is debatable. Rhian-Mari Thomas, chief executive of the Green Finance Institute (GFI), points out that some lenders have signed up to over 300 different disclosures and pledges and yet are still financing coal, for example.
It is perhaps understandable that there are so many voices and so many different initiatives, explains Sonja Gibbs, head of sustainable finance at the Institute of International Finance.
“We have two big questions for the financial sector being addressed simultaneously,” she says. “One is how climate change will impact our industry. It’s driving the need to measure balance-sheet risk, improve disclosure and develop climate scenario analyses. This is more the realm of traditional financial regulation.
“But an equally important question is what the impact of our lending and investment activity is on the environment. How are banks and other financial firms contributing to carbon emissions, how are they reducing emissions through their financing activities and what is their carbon footprint – including the footprint of those they finance? Demand for this information comes not only from regulators but from policymakers, civil society and the public at large.”
Sonja Gibbs, Institute of International Finance
The result is that banks are being pulled in multiple directions.
One sustainable finance head goes as far to say that the noise has slowed down the progression of banks addressing the global economy’s low-carbon transition. Gibbs herself warns that a present there is risk of losing the route to transition amid the enthusiasm for such a broad range of goals.
“We need to take care not to run before we can walk,” she says.
She lays out a path that is helpful to follow. “In an ideal world we would address everything in an order that makes sense – first tackling the lack of data that is preventing us from quantifying the financial risk and the impact finance is having on climate and the environment. With that data, climate-risk analysis and disclosure could be built out.
“Then we could do a better job of scenario analysis and any modifications needed to the capital framework, with the ultimate goal of aligning different jurisdictions around these building blocks so that, for example, Hong Kong isn’t moving in one direction and the Bank of England in another. Given the urgent need to address climate risks, it would be far better to take an appropriately sequenced and well-aligned approach.”
A sequenced approach was put forward by the Principles for Responsible Banking (PRB) – and it’s a coalition mentioned by nearly all sustainable finance heads interviewed as being an initiative that has a clear path to concrete change.
Not everyone is a fan – some of those that haven’t signed up point out that United Nations Environment Programme Finance Initiative (UNEP FI), which set up the PRB, has no role to play in the financial sector. Nonetheless 130 banks from 49 countries signed up to the principles in September this year.
The PRB sets out a clear trajectory that members need to follow with short-term targets rather than goals for 2050 or even 2030. The signatories have agreed to publish reporting and self-assessments within 18 months of signing that shed light on the negative and positive impacts to society of their financing, in addition to setting milestones and monitoring procedures.
Within four years signatories must have fully implemented the required steps laid out by the principles regarding impact analysis, target setting and implementation and accountability.
Within the PRB there is also a smaller group of 34 banks that have signed up to a collective commitment on climate action. The PRB will hold banks accountable for their progress, but it also affords banks the space to explore their own ways of reporting in lieu of any current official standards. The hope is that in doing so, a reporting standard may emerge more organically – one already tested and proved by a bank.
Simone Dettling, UNEP FI
Simone Dettling at UNEP FI says that the principles are perceived as a sea-change for the industry because they address the aforementioned ‘elephant in the room’ by speaking to all finance rather than looking at sustainable finance alone.
“It’s not about competing for the highest number of millions or billions in renewables that you finance – these are not those sort of commitments. Rather it is a commitment to being transparent about what you finance across the board and how you address your core business. It’s about looking at the negatives as much as you celebrate the positives, which is precisely what banks find so challenging to do.”
One sustainable finance head of a bank that is a signatory says: “We can complain that much needs to happen before we banks can take action – that our clients are not transitioning, that regulators are not stepping in, or that central banks need to introduce a green supporting factor.
"But there is one thing we as banks can do ourselves that will make a difference and that is to sign onto the PRB. Because it is a commitment to create an impact, it puts that commitment into action and calls for progress reporting, accountability and transparency. How is it possible that only one third of bank assets are represented? I would like to call on those banks that have yet to join to do so.”
He is not the only one. Some investors are also nudging banks to join. For the last five years Boston Common Asset Management has been engaging with 58 banks – originally selected as the biggest financers to carbon-intensive sectors – working with them towards greater governance and action on climate, and publishing a regular study on their progress as a group. One of its core recommendations to banks has been to sign up to the PRB. Lauren Compere, director of shareholder engagement at the firm says she knows of other large asset managers with bank shareholdings making similar recommendations.
One consultant to banks regarding their sustainable finance businesses also praises the PRB: “If you want to see real change taking place, it’s among the bank chief executives that have signed up. They’re not putting out press releases on multi-billion targets but rather are changing the way their banks approach credit and risk so as to purposefully accelerate the levels of green assets.”
There are some noticeable absences in the list of signatories, however, such as DBS, HSBC, TD Bank and RBC.
There is also very little representation among the US banks – only Citi and Amalgamated have signed up. Morgan Stanley is not commenting on its decision to remain on the outside. The other large banks, such as JPMorgan, Bank of America and Goldman Sachs, say that they already carry out the work being done by the PRB or that they have committed to other initiatives.
But US bankers will also tell you that they just aren’t ready for that level of commitment and disclosure – that there are concerns of litigation risk.
“We’re reluctant to have dangling commitments out there in case we get sued,” says one. “European banks have a certain comfort level with making aspirational statements that US banks don’t have. When the first forestry policies got articulated for example, the Europeans leaned in but then got caught out. Americans don’t want to get caught out.”
It’s not an entirely convincing argument. For one, Citi is a signatory, and secondly there is plenty of litigation aimed at banks that have not disclosed their environmental risk exposure.
“Litigation works both ways,” retorts one market participant.