We share our climate expectations with U.S. regional banks and encourage them on net-zero commitments.
Objective: Encourage U.S. regional banks to push forward on net-zero commitments and share our climate expectations.
We met with three super-regional banks5 over the quarter as part of an investor collaboration spearheaded by Ceres and the Interfaith Center on Corporate Responsibility. The investor group is seeking to raise urgency around the topic of net zero at banks, noting that smaller lenders are generally seen as lagging their larger peers in formalizing their commitments.
Climate change poses a material investment risk for banks. While they have relatively low operational carbon footprints, banks have significant financed emissions, i.e., the greenhouse gas emissions they finance through their lending and financing activities. Through this exposure, it is essential that banks integrate climate risks and opportunities in their business strategy. Otherwise, they might be exposed not only to major reputational risks but also to market and credit risks, which would ultimately impact their financial performance. Large lenders in Canada and the U.S. have already made headlines for the financial support they provide to oil and gas companies and other heavy emitters6, and this has the potential to gain material relevance as climate change worsens. Further, if the companies on the receiving end of bank financing are not decarbonizing, the heightened risk of their inaction has the potential to flow back to the lender.
The larger firms we speak with have made net-zero commitments and have started to set interim targets for certain heavy emitting sectors. They have gradually built a system to better understand their clients’ climate risk profiles, and some have started targeted client engagements—although even larger firms have work to do in articulating their transition plans.7 What we are learning is that smaller banks have barely begun to tackle the problem. They do not necessarily have a structured way to learn what their commercial clients are doing about their carbon emissions and have yet to define their climate expectations. This is one of our key requests of banks—that as a condition of financing, they know how their heavy-emitting clients intend to transition and are monitoring progress.
We do not expect banks to stop lending to heavy emitters. In fact, bank financing to those companies is a necessary component of a successful energy transition. What we do expect is that banks understand the climate-related risks in their loan portfolios and that they manage and disclose their plan on how to transition their clients to net zero. We feel that as it stands, smaller U.S. banks have some catching up to do.
Next steps: While we are pleased with the banks’ engagement with the investor group’s expectations, we are considering escalating the issue to the boards of the U.S. super-regionals to encourage them to step up their net-zero commitments and actions.
