Financial institutions underestimate their climate-related risks
In a first-ever analysis of financed emissions based on self-reported data by 332 financial institutions (asset managers, banks, institutional investors, and insurers), CDP found that portfolio emissions of these global financial institutions on an average were over 700 times larger than direct emissions.
The financial institutions commonly identified climate related risks classified as operational risks (41%) rather than credit risks (35%) such as defaults on loan repayments and market risks (74%) such as stranded assets and financial asset price devaluation. However, credit and market risks have a much higher potential financial impact, which the non-profit organisation estimates to be around $1.05trn. “Some banks, asset owners, asset managers and insurance companies have not yet identified risks in their financing portfolios, which will be of a greater magnitude than those in their own operations,” highlighted the Time to Green Finance report. Most financial institutions reported some board-level oversight of climate-related issues, largely focussed on their direct operations rather than financing activities.
Far from green reality:
Financial institutions hold the key for the net zero emissions, resource-secure economy needed, said Laurent Babikian, director for capital markets at CDP Europe. “All of the industry’s environmental impact comes from its investment, lending and underwriting activities, and rather than contributing to our climate crisis, this capital must be leveraged instead as an engine for rapid change,” he explained.
Despite the push towards net zero goals, almost half (49%) of the financial institutions surveyed revealed that they do not conduct any analysis of how their portfolio impacts the climate at all. Only 25%, comprising 84 financial institutions worth $27trn of assets, reported their financial emissions, which are over 700 times larger than reported operational emissions. Under half of banks (45%), asset owners (48%) and asset managers (46%) reported taking action, such as setting science-based emissions targets for example, to align their investments to a below 2°C goal while only 27% of insurers are using this to underwrite their portfolios.
Increased interest in sustainable financial products:
The report’s glimmer of positivity included financial institutions’ renewed focus on low-carbon transition opportunities. More than three quarters of financial institutions (76%) expressed their interest in products such as sustainability-linked loans, green and transition bonds, sustainable investment funds and insurance solutions, which totally amount to $2.9trn. The report also named best practices from financial institutions such as BNP Paribas for its processes to access nature-related risks in its financing portfolios, Allianz SE for governance and climate-related issues and ABN Amro for measurement and disclosure of portfolio emissions.
There is, however, a long way ahead. CDP stressed that financial institutions must engage with portfolios and insist that companies are prepared for net zero transition. Currently, less than half (46%) of asset owners and 50% of asset managers reported engagement, most commonly as active owners.