Ensuring Planetary Stability: Banks as Unlikely Allies?

Of all the types of institutions playing a role in averting catastrophic climate change, banks are perhaps unlikely protagonists. Yet by the everyday process of allocating capital and issuing loans to clients, lenders can be powerful allies or destructive antagonists in the fight for a just and climate-safe world. Traditionally, banks manage localized financial risks their borrowers might face, but the impact of their lending decisions has significance on the climate, our ecosystems and overall planetary stability.

At this year’s COP26 conference, the financial sector will be high on the agenda. The Glasgow Financial Alliance for Net Zero (GFANZ), chaired by Mark Carney, will convene institutional commitments from across the financial sector including the Net Zero Banking Alliance (NZBA) with 43 banks promising to reach net-zero by 2050. That still leaves a lot of the banking sector who have not made those commitments, and even for those who have, criticism has been levelled at their lack of near-term action and ongoing investments in fossil fuels.

The global financial sector is jeopardizing an environmentally sustainable future by facilitating climate change beyond a 1.5 or 2 degrees Celsius temperature rise. Since the Paris Agreement in 2015, the world’s 60 biggest banks funneled USD 3.8 trillion into fossil fuel activities, despite many publicly committing to Paris-aligned net-zero targets. None have responded to the IEA’s declaration that any expansion or exploration of fossil fuels is incompatible with a 1.5 degree scenario. The largest banks have also bankrolled extinction: in 2019 alone, they invested $2.6 trillion into activities that are responsible for the destruction of terrestrial and ocean biodiversity.

Progress on this systemic problem requires bringing campaigners, stakeholders, and banks together to change the finance system. The Climate Safe Lending (CSL) Network is a transatlantic multi-stakeholder collaborative of banks, NGO’s, investors, regulators, experts, and leaders from across the banking system. CSL aims to accelerate the decarbonization of the banking sector to secure a climate-safe world in line with a well-below 1.5C temperature rise. We believe that a cross-sector network approach can harness the collective intelligence of the system to find new and bold solutions, foster new relationships amongst leaders, and mobilize the power of many to ensure that the financial system contributes to a climate-safe future. CSL hosts cross-sector convenings, publishes emerging insights, and houses several key initiatives.

A key pillar of the Network is the Climate Safe Policy Initiative, grounded in CSL’s report, Financial Stability in a Planetary Emergency, published by UNEP FI and Climate-KIC. We proposed ten cutting-edge proposals for climate-related financial regulation that could shift financial flows to safeguard planetary (and by extension financial) stability. The proposals were assessed by experts from across the system based on impact and feasibility. They included the creation of a non-proliferation treaty on fossil fuel and deforestation finance, the implementation of a ‘climate communities reinvestment act’ to redirect capital to communities and ecosystems on the front lines of climate change, and more.

The Climate Safe Policy Initiative currently focuses on the following key proposals:

• Full disclosure of the climate impacts of financial activities
• Changing the rules for capital buffers that banks need to keep in reserve on the basis of their contribution to systemic climate risk, thereby making finance for fossil fuels and deforestation unattractive
• Mandatory, regulated bank climate transition plans

These proposals, explained in further detail below, can significantly enhance transparency and shift the necessary capital to ensure financial and planetary stability.

First, finance-related climate impact disclosure would require all financial institutions to disclose the climate impacts of their financing. The financial system has an inward focus – focusing on the risks of climate to the financial system, rather than an outward focus on how the financial sector contributes to climate breakdown. CSL recently responded to the Task Force on Climate-related Financial Disclosures’ (TCFD) request for public comment and urged the TCFD to expand its scope to include finance-related climate impacts. A new Task Force for Finance-related Climate Impacts (TCFI) could help understand the impacts financial portfolios have on emissions and encourage disclosure of nature-related impacts, to foster greater transparency of banks’ direct impacts on oceanic and terrestrial biodiversity destruction.

Second, financial regulators can tweak capital requirements – the amount of capital banks are required to hold against certain exposures – to account for climate and nature-related risks. Building on the work of Finance Watch, we argue that exposures to new fossil fuel projects should have a 1250% risk weight, so that banks hold capital at least equal in value to these exposures. This would not only protect the financial system against instability as fossil fuel assets become stranded, but it would increase the cost of lending to these projects and incentivize banks to shift away. Changes to the bank capital framework should not be limited to fossil fuel exposures; they could extend to exposures to activities that impact ocean ecosystems, such as industrial fishing.

Practical guidance and strategies for net-zero transition plans could spell promise for terrestrial and ocean ecosystems. There is a flurry of activity around banks setting net-zero targets and goals by 2050; however, no one quite knows how banks should develop net-zero transition plans or what a good one looks like. CSL is creating a “Good Transition Plan” concept paper, reflecting stakeholder expectations and emerging best practices to guide what needs to be done to limit emissions in bank operations, lending practices, client strategies, and how to best reach net-zero goals before 2050.

While CSL focuses on climate change, these policy proposals can ensure progress on a holistic range of sustainability impacts including social impacts and the conservation and restoration of terrestrial and ocean ecosystems. While progress has been made, there is much work to be done by all relevant stakeholders to ensure a climate-safe and ecologically stable future and banking system.

Learn more about the Climate Safe Lending Network by visiting our website and subscribing to our monthly newsletter. We invite you to reach out with questions or opportunities for collaboration by emailing: connect@climatesafelending.org

 

Article by David Barmes and Marya Skotte, Climate Safe Lending Network

David Barmes, Senior Economist, Positive Money & Climate Safe Lending Policy Initiative Support, Climate Safe Lending Network. David leads Positive Money’s research on green central banking and escaping growth dependency, while also contributing to our work on monetary-fiscal coordination and the economic response to Covid-19. He holds a bachelor’s degree in Economics and Psychology from McGill University and a master’s degree in Socio-Ecological Economics & Policy from the Vienna University of Economics and Business. David has previously worked on projects in environmental politics, environmental conflict, and ecological macroeconomics.

Marya Skotte, Program Manager, Climate Safe Lending Network. As CSL’s Program Manager, Marya contributes to the growth and development of the Climate Safe Lending Network and its ongoing initiatives. Marya manages CSL’s communications, and contributes to stakeholder engagement and recruitment, and core operations. Prior to joining the Climate Safe Lending Network, Marya graduated from the Impact MBA program at Colorado State University where she studied entrepreneurship and sustainability for business. While in the program, Marya researched socially and environmentally sustainable finance and launched a venture with other students to help mission-driven lenders implement socially sustainable financing. Prior to her MBA, Marya managed a national network of partners at the National Park Foundation in Washington, DC.