New research puts big banks’ sustainability claims in doubt
New research from responsible investment watchdog ShareAction reveals the leading practices by European banks across eight critical climate and biodiversity-related topics. These include net-zero targets and alignment, high-carbon disclosures, sector policies (relating to coal, oil and gas, shipping, and biomass), biodiversity, and executive remuneration. It shows that, while some banks are demonstrating leadership on specific issues, no European bank has a comprehensive plan to ensure sustainability across all topics.
Xavier Lerin, Senior Banking Analyst and an author of the report, said: “Our research shows that there is a large disparity between the credentials of leaders and laggards on each environmental issue. There is no excuse for banks which have not yet adopted the leading practices of their peers, though it should also be noted that, in many cases, even the leading practices in the sector continue to fail basic litmus tests on climate and biodiversity.
Moreover, no bank demonstrates leading practice on all issues. As such, there is a huge amount that all banks can do right now to address their environmental impacts and we call on them to publish credible climate and biodiversity strategies ahead of COP26.”
Twenty of Europe’s 25 largest banks have pledged to zero-out emissions from their portfolios by 2050 at the latest. But very few have started taking more concrete steps to achieve this goal. Only three banks (Lloyds Banking Group, NatWest and Nordea) have committed to halve their financed emissions by 2030 to ensure they are on track to meet their 2050 target. Eight banks have set interim targets for the most carbon intensive sectors, but only three of them (Barclays, Crédit Agricole and NatWest) use an absolute emissions metric or complement their targets with additional financed emissions disclosures to ensure their targets lead to an actual decrease in emissions. And even though 65% of banks’ fossil fuel financing comes from capital market underwriting, only Barclays currently covers these activities in its targets.
Less than half of the banks have committed to a phase-out of financing to thermal coal-related activities and most of these policies are ridden with loopholes. Only seven banks restrict corporate finance for companies developing their coal mining capacities, while just one bank (Crédit Mutuel) has implemented both relative and absolute thresholds for the coal power and mining sector in line with the Global Coal Exit List recommendations.
Crédit Agricole is commended for having one of the most ambitious coal policies among global corporate and investment banks. Its policy excludes dedicated financing or refinancing for thermal coal mines and coal-fired power plants, including expansions, as well as coal infrastructure projects. In addition, Crédit Agricole does not enter relationships with clients that have expanded their coal capacity since 2020 and from 2021, it will stop working with existing clients that are expanding their coal capacity. The bank also requires its clients to publish a coal phase-out plan by the end of 2021, while its own phase-out strategy applies to all products and services (including asset management).
Oil and gas policies
While many banks claim to be exiting certain unconventional sources of oil and gas, such as that extracted from the Arctic, only one bank (Intesa SanPaolo) has committed to phasing out its exposure to all unconventional oil and gas sources (including oil sands and fracking). Most banks also place some degree of restriction on current financing for unconventional sources, but retain substantial exposure to these activities through corporate finance for diversified companies such as oil majors.
For example, UniCredit demonstrates leading practice by excluding asset-level finance for a broad range of unconventional oil and gas activities and restricts corporate finance for companies with a revenue share of 25% or more from unconventional sources. But most diversified energy companies, including oil majors, do not meet this threshold and as a result UniCredit has been the largest financier of Arctic oil and gas activities ($1.5bn) among European banks since the Paris Agreement was signed, driven by its exposure to companies such as Gazprom and OMV.
No European bank has yet committed to fully stop financing new fossil fuel expansion, despite the IEA’s finding that 1.5C means no new fossil fuels. However, Danske Bank and NatWest have introduced project finance restrictions linked to the expansion of the oil and gas industry. Danske Bank’s position statement on fossil fuels excludes project finance for the expansion of oil and gas exploration and production. NatWest’s oil and gas policy excludes dedicated financing for projects involving exploration activities for new oil and gas reserves. But no European bank currently enforces any corporate finance restrictions for companies involved in the development of new conventional oil and gas reserves.
ShareAction argues that biomass urgently deserves greater attention from climate conscious financiers. At the point of combustion, wood emits more CO2 than coal, while it takes decades for this carbon to be reabsorbed by forest growth. Yet the sector remains neglected by banks, with 13 European banks still listing biomass as a sustainable form of energy.
Rabobank currently discloses the most comprehensive policy, which expects clients to produce biofuels that provide clear GHG emission benefits after considering the entire lifecycle of raw material compared to fossil fuels.
While most financial institutions are taking steps to address the existential risk posed by climate change, the sector’s approach to the equally grave threat of biodiversity loss is still in its infancy. Just ten of the 25 banks have a biodiversity policy. Rabobank goes further than most by setting ‘expectations’ for clients, that they should not operate in protected areas or damage high conservation value forests. But these expectations do not explicitly prohibit clients from operating in these areas, thus limiting the impact of Rabobank’s policy.
Most banks have integrated some form of sustainability metric into their executive remuneration strategies. But in many cases these metrics have little relevance to the bank’s overall impact on the climate. For example, many remuneration policies incentivise the reduction of banks’ operational carbon emissions (such as those from the electricity used to power their offices), instead of incentivising them to reduce their financed emissions and financing of Paris-misaligned activities, such as fossil fuel expansion. Some exceptions to this rule include NatWest and ING, which incentivise their CEOs to help set climate-related targets for their loan book of clients in specific sectors, and Crédit Agricole, which links executive remuneration to the implementation of specific climate commitments, such as the successful implementation of its coal policy.
The role of investors
ShareAction’s report does not include a ranking, but rather seeks to showcase the current leading practices in each area, to help investors challenge other banks to follow these examples. It provides checklists of leading practices and next steps for bank policies on each topic, as well as suggested engagement questions to help investors challenge banks on their plans. Where investors are dissatisfied with banks’ responses, ShareAction encourages investors to vote against directors and to file and vote for shareholder resolutions on climate change and biodiversity at banks’ 2022 AGMs.