Global Business

Banks Fall Short on Climate Change

Financial services firms must do more to move the economy away from fossil fuels and investments in high-carbon businesses, a new report pleads.
Stephen TaubJanuary 10, 2008

Financial institutions are not doing a good job of confronting the business challenges posed by global climate change. That’s the conclusion of a report published Thursday that analyzes climate-change governance practices of 40 of the world’s largest financial services firms.

The highest achiever was HSBC Holdings, followed by another European company, ABN AMRO. On a 100-point rating scale they scored 70 and 66 points, respectively; more than half of the banks received less than 50 points, with a median of 42.

“More banks realize that climate change is a big business issue, but their responses so far are the tip of the iceberg of what is needed to tackle this colossal global challenge,” said Mindy Lubber, president of Ceres, the coalition of investors and envrinomental organizations, which issued the report. Titled “Corporate Governance and Climate Change: The Banking Sector,” it was written by RiskMetrics.

“As a key provider of capital and financing worldwide, banks must do more to move the economy away from fossil fuels and high-carbon investments that are exacerbating climate change,” Lubber said.

The report found that a growing number of European, U.S., and Japanese banks are responding to the risks and opportunities presented by climate change, primarily by setting internal greenhouse gas (GHG) reduction targets, boosting climate-related equity research, and elevating lending and financing for clean-energy projects. But many others are still not addressing climate change and only a handful have begun integrating climate risks into their core lending business by pricing carbon into their finance decisions or setting targets to reduce GHG emissions in their lending portfolios.

The report employs a “Climate Change Governance Checklist” to evaluate how 16 U.S. and 24 non-U.S. banks are addressing climate change through board of director oversight, management performance, public disclosure, GHG emissions accounting, and strategic planning.

The final scores are weighted to reflect the fact that some banks — specifically, asset managers and investment banks — are not engaged in the full spectrum of product and service offerings assessed by the Climate Change Governance Checklist.

The five highest-scoring institutions were all diversified banks based in Europe: HSBC, ABN AMRO, Barclays, HBOS, and Deutsche Bank. They were followed by Citigroup, Bank of America, and the Royal Bank of Scotland.

Among investment banks, the highest scorers were Goldman Sachs and Merrill Lynch.

Bear Stearns scored a fat zero, and asset manager Franklin Resources got a rating of 1. State Street Corp. fared the best among asset managers, but with a score of only 36.

“Over the next 40 years, we’re looking at the virtual de-carbonization of industrial economies if the warnings of climate scientists are going to be heeded,” said lead author Douglas Cogan, director of climate change research at RiskMetrics. “Banks need to start re-ordering their investment and lending priorities now, especially in the energy sector, to reflect changing asset and credit valuations.”

Ceres did note that many financial institutions have taken positive actions in the past 12 to 18 months, especially in regard to disclosure, internal emissions management, and financial support for clean energy.

For example, the banks have issued nearly 100 research reports on climate change and related investment and regulatory strategies, more than half of them in 2007 alone.

Also, 34 of the 40 banks responded to the latest climate-disclosure annual survey conducted by the Carbon Disclosure Project, a nonprofit group that seeks information on climate risks and opportunities from companies on behalf of investors.

In addition, 28 of the banks have calculated and disclosed their GHG emissions from operations and 24 have set some set some type of internal reduction target.

And 29 of the banks reported their financial support of alternative energy, eight of which alone have provided more than $12 billion of direct financing and investments in renewable energy and other clean energy projects.

On the other hand, Ceres asserted that many of the banks have done little or nothing to elevate climate change as a governance priority — a trend that cuts across European, North America, and Asian banks. For example, just a dozen of the 40 banks have board-level involvement, and all but one of those are based outside the United States.

Only a half-dozen banks say they are formally calculating carbon risks in their loan portfolios, and only one of the 40 — Bank of America — has announced a specific target to reduce greenhouse emissions associated with the utility portion of its lending portfolio.

In addition, no bank has set a policy to avoid investments in carbon-intensive projects such as conventional coal-fired power plants or Canadian tar sands.