30 June 2019

Financial Times: Banks need to get ahead of climate change, or else

Banks are where the financial system and the real economy meet. The UN’s Sustainable Development Goals and the Paris climate change agreement will be unattainable unless banks finance solutions to these massive social and environmental challenges.

Few (if any) banks would have viewed climate change as “strategic” 10 years ago. As recently as last year, the Bank of England found that, while 70 per cent of banks recognised that climate change poses financial risks, only 10 per cent took a long-term view of the risks. And 30 per cent of lenders still considered climate change only a corporate social responsibility issue, with little relevance to business strategy or operations.

Attitudes are shifting fast. For many lenders, climate change has become a topic of concern for risk management, client and investor relations, product development, government affairs and marketing teams, among others.

There is still a long way to go. While climate risks have risen up the agenda, other environment-related risks are also potentially of systemic importance, including those related to nature and biodiversity loss.

There is now growing demand from clients, policymakers and other stakeholders for banks to look beyond risk issues and examine the positive and negative effect of the loans and services they provide on the ability to meet the Paris commitment to keep average temperature rises well below 2C. But how do we ensure both individual banks and the entire sector are making loans aligned with climate goals?

Clearly, executives need to alter practices and standards. That’s something that professional bodies can support with new courses on sustainable finance and by incorporating these topics into existing qualifications and professional standards.

Regulatory change will also spur reform. In April, the BoE said UK-regulated banks and insurers must put in place comprehensive plans to manage the financial risks of climate change and designate responsible senior managers. These regulated entities will need to have the capabilities and tools to measure and manage climate-related risks, including short and long-term scenario analysis. They will need to disclose these risks and have clear lines of responsibility for managing them, including at board level. The BoE also made clear that supervision will become more stringent over time.

Full article on Financial Times (subscription required)

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