Climate change: banking on a greener future?
The banking sector is exposed to the risks of climate change through its financial activities, far more than its operations, and has much to gain from opening up opportunities in the economic transition. As scrutiny around climate transition strategies rises, structured engagement has a pivotal role to play in assessing banks’ readiness to meet this challenge.
“Climate-related risks are clearly among the long-term risks to which financial institutions are exposed: monitoring these risks is not a ‘nice to have’… but a ‘must have’.” This statement came from France's central bank governor, François Villeroy de Galhau,1 on 24 April 2023, effectively throwing down the gauntlet to the financial sector to address arguably the greatest challenge of our time – life in a higher temperature world.
Discussions around greenhouse gas (GHG) emissions reduction often focus on high-emitting sectors such as energy, utilities or industrials. The operations of companies in these sectors account for the majority of global GHG emissions, as can be seen in Exhibit 1. Therefore, these sectors have been primary targets for engagement by asset managers, as highlighted in our paper “Oil & gas majors: active stewardship rather than divestment.”
The operational emissions of banks are comparatively much smaller. This perhaps explains and justifies why they have historically been a lower priority when developing some of the commonly used engagement and analysis frameworks.2
Exhibit 1: Financed emissions reveal the significant relevance of climate change for banks
Source: MSCI, as at 12 October 2023. GHG emissions aggregated by sectors for MSCI ACWI Index constituents, based on companies' most recently reported or estimated Green House Gas (GHG) emissions modelled by MSCI depending on data availability and quality.