The direct impacts of climate change are relatively minor for the banking sector; it is not generally exposed to weather stress nor are its operations fossil fuel intensive. However the indirect impacts via the exposures of its clients means that banks need to assess the impact of climate change on the asset quality of their lending and investment portfolios.
Sustainable Asset Management (SAM), together with WWF and Zurich University, undertook a study to explore how the sector is incorporating climate change into core business processes. It is clear that performance varies considerably within the sector.
One hundred and fourteen banks were assessed against a conceptual framework that covered three main areas - core business, in-house operations and climate governance.
Core business activities include product and service development and the integration of climate change into core business processes. In-house operations looked at mitigating and offsetting activities whilst climate governance assessed overall management frameworks, risk and data management, intellectual capital and disclosure, engagement and leadership.
Using cluster analysis banks were then grouped into four categories – hesitators, product innovators, process developers and mainstreamers. Almost half of the sample were considered hesitators, doing little more than managing emissions from their own operations. A fifth were classified as product innovators whose efforts have primarily focused on developing specialised climate products and services. A further quarter had a climate management framework in place and were considered process developers.
Only six companies globally were recognised as mainstreamers, who, when compared to their peers, had most comprehensively integrated their approach to climate change over their entire value chain. These were ANZ, Citigroup, HBOS, Santander, UBS and Westpac.
Geographically banks in Oceania and South America were top performers. The report proposed that this may be due to the fact the there is greater evidence of climate change impacts in these regions, including severe droughts.
Examples of leading activities included a clear articulation of carbon abatement opportunities within their business, sector specific financing policies for carbon-intensive industries, the development of advisory services, energy efficiency loans and carbon farming products. Also featured were specific climate change investment funds and climate change related property trusts featuring greener buildings. Collaboration and leadership on local issues such as the impacts on agriculture and the development of proprietary rating and pricing tools were also hallmarks of the mainstreamers.
But even the leaders have a long way to go if the challenges of climate change are to be met. Very few banks had included adaptation considerations into business policies and none had a comprehensive product portfolio or a truly comprehensive approach to addressing the complexity of climate change within their credit screening processes.
Climate change strategies in the banking sector will be guided by the impact of climate change in earnings and asset quality in the mid to long term. To understand how this will play out will require specific in-house skills and processes to understand the impacts. However the day-to-day management of climate issues will need to be embedded into business as usual governance and decision-making processes.
Banks will need to improve the skills and knowledge of their current teams or buy in expertise. IT supported information systems and databases are required to assess climate change impacts on lending portfolios. This will allow for the development of appropriate risk management and ratings tools and facilitate risk adjusted pricing for lending and financing as well as the development of new products and services.
By doing so individual banks will put themselves into a position of competitive advantage.
Furrer, B., Swoboda, M., Hoffmann, V. (2009) Banking and Climate Change: Stumbling into Momentum
© Article 13 - November 2009
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