Climate change threatens banks more than they reveal
Steam is released through exhaust stacks at Great River Energy’s Coal Creek station in North Dakota. Some of the biggest banks in the United States have cut lending to the coal sector in recent years, but they need to do a lot more to reduce climate risk in their loan portfolios, according to a new report.
Daniel Acker | Bloomberg | Getty Images
The financial world is starting to reckon with a hard truth: climate change poses a clear threat to the entire American financial system.
With wildfires ravaging the west coast, hurricanes hitting the south and a mega-drought emerging in the west, investors, lawmakers, former regulators and advocates are sounding the alarm bells for U.S. financial regulators and banks that they regulate on the danger which our markets are confronted with. if they do not take action to protect themselves against this risk.
This summer, some of the country’s biggest investors sent public letters managers of financial regulatory agencies, asking them to take over from climate change as a systemic financial risk. California Controller Betty Yee wrote an editorial urging “leadership from every US financial regulator to move to a resilient, sustainable and low-carbon economy and avoid a climate-fueled financial collapse.”
Senate and House Democrats published reports detailing the risks and calling for more stringent measures to mitigate them. In September, a subcommittee of the Commodity Futures Trading Commission even published its own report, advising his own agency and many others to step up and lead on the climate in order to avoid a potential crisis.
Today, a new look under the hood of US banks highlights the extent of this risk.
The US banking sector is much more vulnerable to the impacts of climate change than banks suggest, according to a new study. This vulnerability should affect not only large investors and regulators, but anyone with savings in a bank or money invested in a retirement fund.
This research reveals that in addition to losses due to the physical impacts of climate change, every major US bank faces the potential for dramatic losses from the failure of the companies they lend to plan to transition away from fossil fuels. These findings come from an assessment of not only US banks’ fossil fuel lending, but their broader lending portfolios – including the risks that an unplanned transition from fossil fuels would have on the assets of sectors that depend on these industries. . most like agriculture, manufacturing and transportation.
In its new report, Financing a Net-Zero Economy: Measuring and Addressing Climate Risk for Banks, Ceres finds a significant level of exposure to climate risk within the syndicated loan portfolios of the largest banks.
Given this more comprehensive view of climate risk, this exposure is so large that it could trigger a financial crisis, with more than half of the syndicated loans of all major US banks being exposed to significant climate risk, which could be translate into over $ 100 billion. in losses. In addition, this figure reflects only part of their balance sheet and assesses only one type of climate risk. If the full balance sheet were made public, the potential losses would likely be even greater.
So what should a bank, or a regulator, do?
US regulators can do what financial market leaders ask them to do: regulate climate change as a systemic financial risk. This includes the obligation to disclose the climate risks of the sectors they oversee and the obligation for financial institutions to integrate climate risk into their scenario analyzes and stress tests. Central banks in Europe, Canada, Japan and New Zealand are already doing this. It is time for US regulators to do the same.
We are starting to see US regulators start to act. California Insurance Commissioner Ricardo Lara has created a public database of green insurance products, New York Department of Financial Services superintendent Linda Lacewell told insurance companies they need to integrate climate risk in their scenario analysis. The Fed’s regional offices, particularly those in San Francisco, Richmond and New York, are taking steps to better understand the systemic risk of climate change.
This movement is set to grow as climate change worsens and the financial implications of not taking action become clearer.
But banks can’t wait for regulation to come. They need to proactively assess and disclose their total exposure to climate risk, which will benefit them regardless of new laws or regulations. The current focus is on syndicated bank loans because that is what is publicly available. For banks, their investors, clients and regulators to better understand the sector’s vulnerability to climate change, banks need to quantify climate risk at the enterprise and portfolio level across all asset classes and lines of business. activity.
Banks that are already measuring their vulnerability to climate change should deepen their knowledge and start leveraging their lending power to ensure that those they lend disclose their emissions and expose their business plans in a carbon-constrained world. . We started to see this with the banks moving away from financing coal. We need to see them leading this type of engagement across their loan portfolios. If that commitment doesn’t lead to action, they should be ready to go.
Finally, banks must act to mitigate their exposure to climate risk by engaging directly with clients and by committing to align their client portfolios with the objectives of the Paris Agreement. These commitments should include detailed milestones and specific timelines for sector portfolios to achieve net zero emissions by 2050 or earlier. We have recently seen encouraging progress in the form of commitments from major U.S. banks such as Morgan stanley and JPMorgan Chase. However, there is still work to be done by these companies and others to achieve the required level of specificity and ambition.
Banks and regulators have their work cut out for them, as do the investors and customers who rely on them, but the job will be much more difficult and costly the longer they wait. The vulnerability of banks to climate change will continue to increase regardless of the outcome of the US presidential election. To avoid another systemic crisis like the one the world experienced in 2008-2009, only concerted, systemic and preventive actions will suffice.
—By Steven M. Rothstein, Managing Director of Ceres Accelerator for Sustainable Capital Markets, and Dan Saccardi, Senior Director, Corporate Network, at Ceres. Ceres recently released the report Financing a Net Zero Economy: Measuring and Managing Climate Risk for Banks.