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January 14, 2008
Are Banks Getting Caught With Their Umbrellas Down?
    by Anne Moore Odell

A new report from the RiskMetrics Group ranks 40 of the world's largest banks responses to climate change risks and possibilities.


In 2007, the banking sector plunged into climate change. A new report from RiskMetrics commissioned by Ceres, an investor and environmental coalition, studied the top 40 global banks and finds some good work already started to address climate change, but much room in the banking sector for improvement.

"With nearly $6 trillion in market capitalization, the global financial sector will play a vital role in supporting timely, cost-effective solutions to reduce U.S. and global greenhouse gas emissions," wrote Mindy S. Lubber President of Ceres in the report's foreword. "As risk management experts, it is essential that banks begin now to consider the financial risk implications of continued investment in carbon-intensive energy technologies," Lubber continued.

Douglas G. Cogan, Head of Climate Change Research at RiskMetrics, authored the report "Corporate Governance and Climate Change: The Banking Sector" with the support of the RiskMetrics' climate change group including Megan Good and Emily McAteer. The report used climate change information from annual reports, company websites, responses to the Carbon Disclosure Project's (CDP) annual questionnaire, and third party information to compile profiles on each of the 40 banks.

"For a global economy already faced with $100-barrel oil and a projected 50 percent increase in energy demand over the next 25 years, the climate change 'mega-trend' may bring the global economy to a historic tipping point," writes Cogan. "While globalization and the spread of market-based economies have created wealth for a fast-growing human population, they have also hastened a day of reckoning when fossil fuel shortages and excess climate-changing emissions could combine to spawn a global climate and energy crisis."

The report analyzes 16 US, 15 European, five Asian, three Canadian and one Brazilian banks and finds that European banks are ahead of the pack in their climate governance responses. The study scores the banks on a 100-point system, based on a Climate Change Governance Index. The Index consists of 14 indicators that evaluate five bank governance areas: board oversight, management execution, public disclosure, emissions accounting, and strategic planning.

The highest-ranking bank in the study was HSBC Holdings with 70 points. In comparison the average score across banks was 42. Goldman Sachs scored highest among the investment banks with 53 points and State Street received 36 points to lead the asset managers scored.

The laggards named in the report include the bottom scoring banks, Ind. Bank of China (8 points) and Bank of China Ltd (4 points); the investment banks Lehman Brothers (26 points) and Bear Stearns (0 points); and the Asset Managers Legg Mason (3 points) and Franklin Resources (1point).

"The primary reason the European banks are ahead is that the EU has adopted the Kyoto Protocol and the EU emissions trading scheme (ETS). There is a real price on carbon emissions in the EU," Cogan told SocialFunds.com.

Cogan continued, "Beyond that, culturally, a lot of the EU banks are not only looking at the financials, but their consumer relations, as well. I think that it is fair to say the debate over climate change was settled a long time ago in Europe. The debate is, are we moving fast enough? EU banks are moving in line with what their consumers are thinking."

The study reports that banks are documenting their efforts regarding climate change, with many banks issuing climate change reports. A telling fact from RiskMetrics study is that of the 97 climate change research reports written by the 40 banks, 57 were issued in 2007. Cogan pointed out that in France banks are regulated to include climate risk information into their federal filings.

One quarter of the 40 banks have promised to become "carbon neutral," while 28 disclose their greenhouse gases (GHG) emissions. Over half of the banks included in the report have likewise embraced carbon and GHG emissions trading with 17 banks trading emissions with the European Union Emissions Trading Scheme and seven banks trading under voluntary US exchanges.

Consumers have seen a marked increase in green banking products in the last two years. Ten banks offer climate-specific funds and indexes, and 21 banks offer climate-related investment products. Green mortgages, credit cards, and car loans are other retail products offered by 22 of the 40 banks studied.

However, US banks are moving forward and catching up with European banks. Cogan explained. "One of the reason that US banks are catching up is that major US banks have branches in Europe. For example, Goldman Sachs based in London, is a climate change leader."

Another reason US banks are stepping up their work to address climate change is that they realize climate change legislation will be introduced after 2008..

"The higher scoring US banks have formally called for carbon trade and carbon caps, not only reporting," Cogan said. "The banks are actually lobbying for it. If trade and cap passes, it is a huge new business for banks."

In the immediate future, Cogan suggested that the banking community could see the value of trading in carbon overtake the value of trading in oil. Carbon trading certainly does offer many opportunities for new investments and retail products.

"Most banks aren't threatened by climate change regulations," Cogan explained. "It is the banks that are still deeply involved financing the fossil fuel industry who are worried. They need to move away from financing these industries. The challenge for these banks, even the big banks like Citigroup's investment in the coal industry, is to look at their lending portfolios and see how they can clean them up."

Cogan pointed to the Bank of America who is looking to shrink the carbon footprint in its lending portfolio. The number of banks that include formally the cost of carbon risk in their loan portfolios is small (six out of 40), but Cogan sees this number growing as more banks create climate-lending policies.

 

 
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