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The Paris Agreement on limiting the rise in global temperatures opens up new lending opportunities related to low-carbon projects while highlighting an array of new risks for financial institutions.
April 21 - New York
The six largest U.S. banks have jointly issued support for a "strong global climate agreement," ahead of a global summit on climate change in Paris in December.
September 28 -
Several big banks have hired environmental professionals from far outside the world of banking to make sure banks' clients aren't doing things to threaten water quality, public health or worker safety. The executives' job is to protect their banks' credit books and reputations.
May 21
The discussions leading up to the
As loan originators and corporate issuers, banks provide credit to a whole host of sectors facing their own particular threats — or enjoying new investment opportunities — from climate change. For this reason, the financial services industry would stand to gain from companies — banks included — submitting dedicated disclosures about how they expect to be impacted by climate change.
The risks and benefits from climate change that would be made more transparent through disclosures go beyond the obvious. These risks are not limited to banks' exposure to carbon-intensive industries such as oil and gas or utilities, nor are the opportunities limited to the growth in the renewable energy sector.
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Greater disclosure of climate change risk by commercial borrowers would help banks analyze how risks and benefits are different from one industry to the next. For example, in the
In the
Yet banks should not analyze the risks of an entire industry with a broad brush; the magnitude of the financial impact on individual borrowers varies significantly. Some companies are more exposed than others, and their exposure is dependent in part on how well they manage risks that are out of their control.
In a low-carbon economy, a company's relative carbon content, combined with the organization's cost for extracting reserves, will help determine its value sensitivity. A 2013
That variability means there is a different level of risk inherent in banks' reserve-backed loans to different energy companies. And investors need to ask whether banks account for these variations in risk in assessing creditworthiness.
An analysis by the SASB of the largest banks' Securities and Exchange Commission filings found that half of the industry either has no disclosure or only boilerplate statements describing climate-related risks in lending portfolios. And unfortunately, the same is true about the quality of climate change risk disclosure in other industries. Over 60% of large public companies do not provide company-specific disclosure of climate risk factors.
To ensure risk is properly priced in originated loans, banks need their borrowers to provide standardized disclosure of their company-specific climate-related risks. However, metrics that measure climate-related risks and opportunities vary by industry depending on the channels of financial impact on companies. Because of that, banks must push for the standardized reporting of sustainability risks — including those related to climate — on an industry-by-industry basis. These accounting standards must be developed from both quantitative and qualitative metrics that allow companies and investors to measure and benchmark performance on an industry-specific level.
Commercial banks are in a unique position to benefit from sustainability accounting standards as loan originators and corporate issuers. Market adoption of sustainability accounting standards would allow banks to account for climate risks across their entire loan portfolios while transparent disclosure from banks themselves would help their investors understand these risks in turn, resulting in more efficient capital allocation across the entire market.
Anton Gorodniuk is the financials sector analyst for the
