What are Large Global Banks Doing About Climate Change?

This research report from the Federal Reserve Board analyses the efforts of major international banks to address their climate-related risks and address climate change. In evaluating 30 global systemically important banks (GSIBs) across North America, Europe, and Asia, the report analyses their public disclosures in order to understand their adaptation efforts, mitigation efforts and challenges in achieving their climate-related goals.

Adaptation efforts

The Fed’s report finds that 25 banks have a dedicated board or executive-level group focused on addressing climate risks, and 26 have a group focused on ESG and sustainable finance. However, the report notes that “banks have generally been quicker to assess the impact of climate change on their own activities rather than the impact of their activities on climate”. In addition, these internal groups appear to be aimed at understanding how banks should manage their investments for their own risks and profit, rather than for achieving net-zero targets.

To that end, the report notes that only 18 GSIBs have signed on to the UN’s Principles for Responsible Banking, while 24 have joined the Net Zero Banking Alliance (NZBA). Further, the report explains that, “because these initiatives are very recent and do not require any immediate changes from signatory banks aside from a commitment to the initiative’s stated goals, their impact remains to be seen”.

Additionally, 24 banks have begun identifying various “high transition risk” sectors. However, without global standards or classifications, the report notes that “GSIBs have taken their own approach, which has led to inconsistencies”. To demonstrate the inconsistencies, over 90% of banks identified “power and utilities” as a top risk than any other sector, but under 40% identified “construction” as one.

Mitigation efforts

Out of 30 GSIBs, 29 are measuring scope 1 and 2 emissions, but only eight are doing any scope 3 measurements. Even then, they are doing so by purchasing data from vendors, with only some supplementing this information with client surveys. The report’s authors are clear to note that the GSIBs that have joined the NZBA have committed to fully offsetting all emissions – including scope 3 emissions – by 2050.

Next, the report evaluates the GSIBs sustainable finance commitments and financial restrictions. It finds that the banks have collectively committed $1.2tn on an annualised basis through to 2030. However, if the banks maintain this pace, it would account for only 26% of $130tn the International Renewable Energy Agency estimates is needed to reach net zero by 2050.

As for the GSIBs’ self-imposed financing restrictions, the report notes that “most of these financing restrictions appear symbolic.” The authors specifically identify prohibitions on mountain-top coal mining, Arctic Ocean drilling, and drilling in the Canadian tar sands which appear to be narrowly defined to avoid reputational damage. They also note that European GSIBs have implemented the most prohibitions, largely around coal mining and coal power. However, the authors’ note that this is likely due to those projects being uneconomical, as a result of the EU’s cap and trade system.

Challenges

The report’s authors identify challenges faced by GSIBs in addressing climate-related risks and meeting national and international net-zero targets. These include data limitations, as most small and medium-sized businesses are not required to report their emissions and most large companies are not required to report indirect emissions; no uniform methodology for measuring scope 3 emissions nor uniform definitions for which sectors are “high transition risk”; difficulties modelling risks given uncertainty around climate risk drivers, including government policies, and banks’ own lack of in-house modelling tools; and different disclosure requirements in different jurisdictions.