Looking back at the year in climate finance

December 30, 2022 4:49 PM

For banks, the potential losses associated with climate change — and the opportunities from transitioning to clean energy — came into sharper focus during 2022.

With prodding from their regulators, U.S. banks took some steps forward on assessing climate risk, but not as quickly as their counterparts in Europe. Near the end of the year, the Federal Reserve Board proposed new guidelines for large banks on how to manage those risks.

Meanwhile, President Biden signed legislation that provides grants and tax credits to the clean-energy sector — presenting new chances for lenders to profit from energy transition.

What follows is a look back at the year in climate finance.

Climate scenario analysis moves forward

Federal Reserve Board Gov. Lael Brainard

Taylor Glascock/Bloomberg

In September, the Federal Reserve tapped JPMorgan Case, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and Wells Fargo to participate in a pilot climate scenario analysis exercise next year.

Fed Vice Chair Lael Brainard has said that scenario analysis should help with risk management in connection with both the physical risk of global warming, which includes severe weather events, and the transition risk associated with changing consumer behaviors and government policies.

According to a survey released in February, most large and regional banks were still in the early stages of assessing climate-related risks. Only 12% of North American banks were conducting scenario analyses.

While more than three-quarters of the North American bank respondents said they were either starting to run such analyses or planning to do so soon, European lenders had moved ahead, partly due to a push by Continental regulators to develop standardized climate-risk data.

Banks fall short in calculating financed emissions

Bloomberg Creative Photos/Bloomberg

Another area where banks have more work to do involves how they calculate emissions.

In May, sustainable finance activists released a report arguing that the emissions associated with big companies' cash holdings — and specifically how banks invest and lend those funds — are underreported in climate-related disclosures.

The report looked at the total emissions profile of 10 large U.S. corporations that had made climate pledges. For five of them, total emissions increased by 91% to 112% when their financed emissions were included, according to the report.

The findings add to an ongoing debate over how to measure greenhouse-gas emissions in the corporate sector. The report's authors argued that large corporations have leverage over what banks do with their money — and could pressure them to finance less carbon-intensive activity — because of the possibility that the companies could move their funds.

Some banks said this year that they are making progress on calculating financed emissions. Bank of America began taking early steps to do so, while Columbus, Ohio-based Huntington Bancshares committed to expanding its future emissions reporting.

Climate legislation promises new ways to make money

President Biden Holds Inflation Reduction Act Of 2022 Event

Samuel Corum/Bloomberg

The Inflation Reduction Act, which President Biden signed in August, provides an opportunity for banks and other lenders to finance the decarbonization of the U.S. economy.

The legislation allocates $369 billion to establish and extend a wide range of tax incentives and grants. The funds, to be disbursed by environmentally focused "green banks" and other lenders, are for renewable-energy projects, the development of clean technologies, the renovation of buildings for energy efficiency and the reduction of greenhouse gas emissions.

By 2030, debt-focused investments supporting an energy transition around the world could offer banks revenue potential of at least $100 billion per year, according to a November report from the consulting firm McKinsey & Co.

The Fed issues guidelines for large banks

Andrew Harrer/Bloomberg

Earlier this month, the Federal Reserve Board of Governors proposed new guidelines for how banks with more than $100 billion of assets should manage climate-related financial risks.

The new framework, which the Fed made available for public comment, calls for banks to establish standards for assessing the risks posed by climate change as well as transition risks.

"Weaknesses in how financial institutions identify, measure, monitor, and control potential climate-related financial risks could adversely affect financial institutions' safety and soundness, as well as the stability of the overall financial system," the proposal stated.

Also in early December, the top supervisor at the Federal Reserve Bank of New York identified climate change as one of the three biggest risks facing the banking system, alongside cryptocurrencies and economic uncertainty.

New York State plants a flag

New York State Department of Financial Services Superintendent Adrienne Harris

Christopher Goodney/Bloomberg

In late December, the New York State Department of Financial Services proposed guidance for state-regulated banks and mortgage lenders to measure and monitor the risk that climate change poses to their loan portfolios.

The guidance, which would apply regardless of a lender's size, quickly drew pushback from the Independent Community Bankers of America. The ICBA said that it would subject small banks to "the same overly burdensome and costly guidance" as the largest banks.

The guidance warned that banks cannot reduce their exposure to climate change by cutting back loans to communities of color and in lower-income areas, which are more prone to flooding and extreme weather events.

In September, New York State DFS Superintendent Adrienne Harris told American Banker that banks "cannot sacrifice" their fair lending and equity obligations "in order to mitigate climate risk."