Integrating Climate Change into Banking Strategies
The consequences of climate change, such as rising sea levels, the occurrence of extreme weather events, the disruption of terrestrial and marine ecosystems, the acidification of the oceans, the reduction in biodiversity, etc., translate into a number of climate risks with a direct impact on the banking sector.
Indeed, some studies estimate that billions of dollars of financial assets could be at risk due to increased extreme weather events, depreciation of carbon assets and impacts on loans linked to climate-sensitive sectors.
Risk assessments carried out by various financial institutions indicate that potential losses associated with climate risks could represent significant percentages of their investment portfolios.
These risks include losses to physical assets, impacts on economic sectors, and losses on loans to climate-sensitive businesses.
Financial assets linked to high-carbon-emitting industries could experience significant depreciation as climate policies are strengthened and the transition to low-carbon economies accelerates.
In addition, the costs of banks adapting to climate risks are also significant : this includes investment in resilient infrastructure, insurance cover against increasing climate risks, and the costs of supporting businesses to adapt to the new climate realities.
Banks are likely to face additional operational costs associated with integrating climate risks into their risk management processes, adopting new business policies and practices, and complying with stricter climate regulations.
II-Banking development strategies to address climate-related issues and risks
1-Development of a Green Finance offering
Faced with these challenges and climate risks, banks need to devise development strategies which, in addition to analyzing climate risks in their financing processes, now include the development of a “Green Finance” offering aimed at both individuals and businesses.
This is in line with their commitment to social and environmental responsibility.
Banks must offer their customers who support sustainable initiatives specific financial products such as green bonds or green savings accounts, enabling them to allocate the funds raised to environmentally-friendly projects such as renewable energies and energy efficiency.
The global green bond market has seen significant growth, with the volume of green bond issues exceeding USD 700 billion by 2020, according to Climate Bonds Initiative.
Banks are also called upon to provide green loans at preferential rates or lines of credit specifically designed to finance green projects. These loans can be made to companies involved in renewable energies, energy efficiency and waste management.
Banks are also invited to develop insurance products tailored to climate risks, to help their corporate and individual customers protect themselves against the financial consequences of extreme weather events.
They should also be encouraged to offer their customers sustainable investment advisory services, helping them to align their investment portfolios with environmental and social objectives.
Banking strategies to meet the challenges and threats posed by climate change must also take into account a number of opportunities in terms of access to various resources and the financing of new projects and activities.
2-Capturing new resources
In addition to customer deposits and funds, and borrowings on the financial markets, banks can partner with investment funds specialized in green projects.
These funds may come from institutional investors, private capital or public-private partnerships that offer financial resources to support green initiatives.
In addition, some governments offer subsidies, guarantees or tax incentives to encourage investment in green projects, from which banks can benefit to reduce the risks or improve the profitability of investments in sustainable initiatives.
Banks can also access international funds and multilateral partnerships, such as the Green Climate Fund, the European Investment Bank (EIB) and the World Bank, which provide financial support for environmental projects worldwide.
3-Financing new projects
Banks must also exploit the opportunity to finance a wide range of climate-related projects.
These projects are generally aimed at reducing greenhouse gas emissions, promoting the transition to a more sustainable economy and building resilience to the impacts of climate change.
Examples of the types of projects that banks are able to finance include:
Renewable energy projects such as the construction and development of wind farms, solar power plants, hydroelectric projects, geothermal power plants or other renewable energy sources to replace fossil fuels and reduce CO2 emissions.
Global investment in renewable energies has continued to grow over the years. By 2020, according to Bloomberg NEF data, investments had reached USD 303.5 billion.
Bank of America is committed to providing USD 1.5 trillion for environment-related activities, including financing for renewable energy, natural resource conservation and investments in low-carbon projects.
Energy efficiency projects such as those aimed at improving the energy efficiency of buildings, industrial infrastructure and equipment, including the installation of efficient heating and cooling systems, insulation and the use of more energy-efficient technologies.
Financing initiatives to promote sustainable transport, such as low-emission public transport, infrastructure for electric vehicles, self-service bicycles and car-sharing programs.
Citi Group has announced its commitment to raise $1,000 billion over 10 years to finance sustainable climate solutions.
Sustainable agricultural projects, such as agroforestry, environmentally-friendly farming practices, methane emission reduction, optimizing the use of agricultural land.
Financing waste management initiatives such as recycling, composting, waste-to-energy and plastic waste reduction.
Banco Santander has drawn up a sustainable finance strategy aimed at achieving carbon neutrality by 2050.
Projects aimed at strengthening the resilience of urban and coastal infrastructures to extreme climatic events, such as floods, storms and rising sea levels.
Funding for reforestation and ecosystem conservation initiatives, such as reforestation programs, ecosystem restoration, wetlands and biodiversity preservation, helping to capture carbon and preserve natural ecosystems.
Financing clean technology research and development activities, such as energy storage batteries, carbon capture and storage solutions and clean energy innovations.
Climate challenges and risks must lead banks to adopt a proactive approach to seizing opportunities linked to the integration of climate risks into their business practices.
By financing different types of green projects, banks must play a crucial role in the transition to a more sustainable economy, resilient to the challenges of climate change.
Moreover, by combining different sources of financing, banks can build up diversified portfolios to support a wide range of green projects. Diversification of funding sources can also reduce risk and enhance the financial and environmental impact of sustainable initiatives.
In addition, regulators and financial supervisory authorities have begun to require banks to take climate risks into account in their operations and financial reporting.
More generally, the integration of Environmental, Social and Governance (ESG) criteria – the pillars of extra-financial analysis – aims to assess how companies exercise their responsibility towards the environment and their stakeholders (employees, partners, subcontractors and customers).
The environmental criterion takes into account waste management, the reduction of greenhouse gas emissions and the prevention of environmental risks. The social criterion takes into account accident prevention, staff training, respect for employee rights, the subcontracting chain and social dialogue.
The governance criterion verifies the independence of the board of directors, the management structure and the presence of an audit committee.
By 2020, total worldwide assets managed according to ESG criteria had exceeded USD 40 trillion, according to the Global Sustainable Investment Alliance (GSIA). This encompasses a range of sustainable investments, including green finance.