We’ve recently completed research with Efma, a global financial services trade association, on how ready banks are to hit their sustainability goals. It included 10 in-depth interviews with major banks: ABN AMRO, Banorte, BBVA, CaixaBank, Desjardins, Deutsche Bank, ING, Maybank, novobanco and Standard Chartered Bank. The full interviews are in the report and well worth reading.

Biggest business opportunity for the next decade
Here's one quote from Antoni Ballabriga, Global Head of Responsible Business at BBVA: “We have in front of us the biggest business opportunity for banks, probably ever, over the next decade. There will be a massive allocation and reallocation of capital in the next 10 years. The amount of money needed to manage the sustainable transition represents a huge opportunity for banks. It’s not just retrofitting old technologies, but major transitions within entire sectors of the economy.”

Serious demands are being placed upon banks by regulators right now (such as the European Central Bank climate risk stress test, for example). Regulators are moving from a voluntary code of conduct to mandatory requirements. But there are also other issues still to be determined: different climate risk model methodologies, a variety of climate standards and ESG ratings, unaudited emissions data reported by non-financial companies – just to name a few. It’s complex.

Are banks ready?

• Two-thirds are just getting started: Almost two-thirds (62%) of our respondents either have a plan (36%) or are starting to execute on their plan (26%). A quarter (26%) are executing but experiencing challenges. A minority (12%) consider themselves advanced in execution (5%) or leaders (7%).
• Only half will be ready for regulatory reporting in the next six months: Just over half (53%) claim to be ready now (31%) or in the next six months (22%) for the coming regulatory initiatives around reporting. However, almost one in five (18%) are still unclear as to what the requirements are and almost one-third (29%) won’t be ready for at least another year.
• Only one in four have a climate risk model ready now: Only a quarter (24%) have a climate risk model up and running, although a third (34%) plan to be in that position in six months. The rest (42%) will not be able to test the impact of various climate scenarios for at least a year, with 12% having to wait two years.
• Over 50% will not hit net zero carbon operations until 2025: Only a small proportion (15%) stated they had already achieved this position. The majority (57%) will not be ready until 2025. Just over a quarter (26%) will be carbon neutral in the next 12 to 24 months.
• Two-thirds are yet to discontinue any client business: For me, this is the real litmus test as to how seriously banks are taking this issue. Almost two-thirds of banks (65%) have yet to exclude certain types of clients or business. A quarter (25%) have stopped working with one to five clients. A minority (10%) have discontinued relationships with six or more clients.
• Data integration is the biggest challenge to climate risk analysis: The main issue is the lack of integration of climate risk data with a bank’s risk management framework. Almost a third (32%) struggle with this issue. Beyond this, there was a cluster of challenges, including the unaudited nature of emissions data reported by non-financial companies, immature reporting and disclosure systems, lack of climate model building skills and too many green financial standards and ratings (all around 12% to 17%).

My next blog will look at how two major banks (BBVA and ABN AMRO) are maximising this opportunity while coping with the challenges of increasing regulatory demands, stress testing and integrating climate data into their risk management framework.

For more information, please download our report: “Taking sustainability seriously: Are banks ready?”