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Winds of Climate Change to Affect Banks

By Steve Viuker

Ready or Not, Here It Comes

A massive report published earlier this year by Boston Common Asset Management (BCAM) takes banks to task regarding their concerns about climate change.
The report states: “Climate change is fundamentally altering the landscape in which banks operate. More than any other industry, the banking industry’s assets are widely distributed across sectors and markets, making it vulnerable to economic and political uncertainty caused by climate change. Through its lending portfolio, a bank’s total carbon footprint is significantly larger than that of its own operational activities. And yet, banks display little attention to the impacts of their lending, underwriting, and ownership activities.”
“We believe that the banking industry has not successfully integrated climate change risk into its long-term strategic planning or understood the implications of this game-changing phenomenon for its business operations,” Lauren Compere of BCAM told Banking New York. “The banking industry needs to develop new financial models to foster its own long-term well-being and to help other businesses achieve sustainable growth. To achieve this level of leadership, banks must come to a more comprehensive understanding of their own environmental impact. They must accurately assess risk levels in their lending models and develop strategic management plans that consider climate change and its implications for credit and risk assessments.”
However, there are some positive aspects to the report.
Many financial institutions, both public and private, and national governments have implemented policies that aim to curtail financing for high-emissions projects.
HSBC’s Energy Sector Policy stipulates that it will not provide financial services to new coal-fired power plants whose carbon intensity exceeds 850 grams of carbon dioxide per kilowatt hour in developing countries and 550 grams of carbon dioxide per kilowatt hour in developed countries.
The Co-operative Bank’s Ethical Policy states that it “will not finance any business whose core activity contributes to global climate change via the extraction or production of fossil fuels (oil, coal and gas),” with an extension to the distribution of those fuels that have a higher global warming impact (e.g. tar sands and certain biofuels).
Credit Suisse states that it will not provide financing to mountaintop removal mining projects or to mining projects that dispose of tailings in riverine or shallow sea environments.
The Overseas Private Investment Corporation (OPIC) has set a goal to reduce portfolio emissions of greenhouse gases by 30 percent by 2018 and 50 percent by 2023. Wells Fargo uses carbon “shadow pricing” to help it more accurately calculate the true cost of high- carbon investments.
Below are specific overviews from the report for various sectors of the banking industry.

Global Warming, Global Reach
China’s Industrial Bank has said that it incorporates environmental issues into its overall strategic planning. It has developed a green credit implementation plan with dedicated departments, training and public advocacy. Many governments have withdrawn support for public financing of new coal plants built abroad, including Denmark, Finland, Iceland, Norway, Sweden, the United Kingdom and the United States. They have all committed to ending public financing for coal, although exceptions for “rare circumstances” are allowed.
Recently in The Guardian, World Bank President Jim Yong Kim said, “there were four areas where the bank could help specifically in the fight against global warming: Finding a stable price for carbon; removing fuel subsidies; investing in cleaner cities; and developing climate-smart agriculture.” Improved access to clean water and sanitation was vital, as he predicted that tension over resources would result from inaction over global warming.
“The water issue is critically related to climate change. People say that carbon is the currency of climate change. Water is the teeth. Fights over water and food are going to be the most significant direct impacts of climate change in the next five to 10 years. There’s just no question about it. So getting serious about access to clean water [and] access to sanitation is a very important project. Water and sanitation has not had the same kind of champion that global health, and even education, have had,” Kim told The Guardian.
A new World Bank Group study looks at a series of climate-smart development project scenarios, including landfills in Brazil, and for the first time on a large scale adds up how government actions can boost economic performance and benefit lives, jobs, crops, energy and GDP – as well as emissions reductions to combat climate change. It provides concrete data to help policymakers understand the broader potential of climate-smart development investments.
“Climate change poses a severe risk to global economic stability, but it doesn’t have to be like this,” said Kim. “At the World Bank Group, we believe it’s possible to reduce emissions and deliver jobs and economic opportunity, while also cutting health care and energy costs. This report provides powerful evidence in support of that view.”
The report, “Climate-Smart Development: Adding Up the Benefits of Actions that Help Build Prosperity, End Poverty and Combat Climate Change,” focuses on five large countries – Brazil, China, India, Mexico and the United States – plus the European Union. It examines the benefits of all six implementing three sets of policies on clean transportation, energy efficiency in industry and energy efficiency in buildings. This report introduces a new macroeconomic modeling framework that can incorporate these considerations, providing a more holistic analysis of the co-benefits of development investments. The new modeling tools:
Measure the multiple benefits of reducing emissions of several pollutants.
Can be used to better design and analyze policies and projects.
Provide a rationale for combining climate action with sustainable development.

This report utilizes the new framework in seven simulated case studies – three dealing with sector policies and four focused on project level interventions – to calculate the many benefits of air pollution reduction.
The sector policies include regulations, taxes and incentives to stimulate a shift to clean transportation; improved industrial energy efficiency; and more energy efficient buildings and appliances. ■


Reputational Risks
Increasing consumer awareness of banks’ role in financing high-carbon projects may heighten consumers’ scrutiny of the industry. Organizations like Rainforest Action Network, Energy Action Coalition, Earth Quaker Action Team and BankTrack are already leading grassroots protest movements to oppose lending to the coal industry. The campaigns are global and multigenerational, cutting across economic, cultural and social divides. Protest targets to date include Bank of America, HSBC, PNC Financial and the Royal Bank of Scotland.
Although most banks have not yet begun to take significant action, they are becoming more aware of these kinds of reputational risks. Of the 94 financial sector respondents to the CDP’s questionnaire for the Global 500 Climate Change Report 2013, more than half viewed reputation and changing consumer behavior related to climate change as presenting significant risks and opportunities.

Legal Risks
History has shown, from asbestos to tobacco, that public health concerns went unaddressed for decades, and dramatic shifts in regulation occurred as a result of changes first in scientific consensus, and then in public sentiment. When assessing high carbon investments, it is helpful for banks and investors to consider the experience of the tobacco industry. Through 1998’s Master Settlement Agreement, U.S. states successfully extracted $207.5 billion from the tobacco industry for damages caused by its products. If a legal precedent is established by this settlement, then we can perhaps expect states to seek to have their costs of adapting to climate change paid for by high-carbon industries.

Investment Banking
The adoption of new technologies will be a boon to primary markets, while secondary ones may profit from climate change regulations, which will provide the necessary infrastructure required for carbon trading markets to function. Innovative financing structures can help advance the market for renewable power and fuels, as they have done in the past for markets like housing. New business opportunities related to renewable energy (wind, solar, biomass) will develop and global trading in a variety of new climate-related markets is likely to increase. Among the examples provided in the reports are IPOs for renewable energy companies, development of weather derivatives, emission trading services and the provision of climate change management consulting. New markets are also expected for green funds and other sustainability-oriented investments.

Posted on Wednesday, November 12, 2014 (Archive on Tuesday, February 10, 2015)
Posted by Scott  Contributed by Scott


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