Climate change: How banks can build a sustainability roadmap
- Posted on November 11, 2021
- Estimated reading time 3 minutes
In my previous blog I highlighted three things banks must do to handle climate change effectively. Now let’s look at how banks can develop a roadmap for sustainability.
Transparency: Show full transparency – as defined by TCFD – in your operations, investments and value chains and report regularly on your progress. Regulators will drive the banking sector to full disclosure, especially around emissions produced by bank customers in the oil, mining, cement and utilities sectors. The Economist estimates that about 5% of such firms account for 80% of emissions.
Lean into green: Change your business model to “lean into green” through your product portfolio. This is critical if you’re to appeal to emerging younger customer groups, such as millennials, with different values from those of the previous generations. This has major repercussions for future investment strategy, especially around wealth management and financial advice (pensions, savings, etc.)
Robust stress testing: Create robust stress testing and scenario analysis for climate risk. You need visibility into emerging and ever-changing physical and transition risks to manage your business effectively, including top-down and bottom-up analysis for specific asset classes. This will require sophisticated model building skills, which you’ll need to bring in quickly. Banks are already experiencing the force of weather shocks on their balance sheet, particularly regarding the loss of property in flood areas, as well as the increasing impact of forest fires and typhoons or hurricanes.
Cloud migration: Reduce direct and financed emissions in alignment with the Paris Agreement goal to limit global warming to below 1.5°C. Accenture reckons migration to public cloud alone can reduce global carbon emissions by 59 million tons of carbon dioxide per year – that’s a 5.9% reduction in total IT emissions and equivalent to taking 22 million cars off the road. Its analysis of the largest public cloud service providers shows average enterprise-to-cloud migrations can reduce energy by 65% and carbon by 84% (98% if apps are designed specifically for the cloud).
Workplace: Hybrid working is forcing banks to work out how people can be fully productive, wherever they are, and how they can be innovative when not collaborating face-to-face. Property rationalization and reduced carbon footprint – due to less employees commuting and reduced in-person business events – are major benefits. However, there are significant differences in the ways banks are encouraging staff to return to the office.
Make hard choices: Demonstrate a clear transition program from a high to low carbon investment portfolio. This will involve hard choices about how to reduce investment or disinvest completely from certain sectors. After a client review during 2020, Standard Chartered identified four clients as 100% dependent on thermal coal. It has ceased new business with all four clients and is exiting these relationships subject to any outstanding contractual arrangements.
Climate risk is such a high-profile issue that no bank will be able to avoid such decisions. These kinds of choices will impact your reputational risk – positively or adversely, depending on the decisions you make.