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Banks Are Finally Starting to Account for Climate Change Risk

Hidden carbon footprints on the books could be the next dodgy mortgage.

Banks Are Finally Starting to Account for Climate Change Risk
Illustration: 731 For Bloomberg Businessweek

(Bloomberg Businessweek) -- Behind the scenes at some of the world’s biggest banks, small teams of employees are busy trying to calculate what might prove to be one of the most important numbers any financial institution will ever disclose: how much the assets on their balance sheet are contributing to global warming.

One of those people is Kaitlin Crouch at ING Groep NV. For the past five years, she’s been dissecting transactions—from corporate loans to residential mortgages—to test ways of measuring the Dutch lender’s overall carbon footprint. It’s an elusive figure. Data provided by the bank’s clients, which range from automakers to energy producers, are often inaccurate, and it’s possible to double or triple count the same emissions when different parts of the bank work with the same client. “It quickly becomes a very daunting and sometimes demotivating topic once you start to understand the level of complexity,” Crouch says.

Doing the bookkeeping on carbon may not be glamorous work, but banks are slowly seeing the need for it. The United Nations last year warned that without dramatic new limits on global temperature increases in the next decade, humanity could see food scarcity, mass migrations, and instability as soon as 2040. For banks, one concern is that if society ignores the problem and is later forced to transition quickly to a low-carbon economy, companies and assets that produce a lot of emissions might see a sudden collapse in value.

Bank of England Governor Mark Carney has warned that financial companies could face a ­“climate Minsky moment” unless they begin to disclose their exposure to global warming risks. He was referring to the economist Hyman Minsky, who argued that ­financial crises are caused by ­hidden risks building up on balance sheets. (Think dodgy mortgages.) The idea is that climate change could be one of those unaccounted-for vulnerabilities.

Now, after record-high temperatures ­ravaged Europe in July and California wildfires led to the January bankruptcy of utility PG&E Corp., ­dozens of global banks, insurers, and pension plans seem inclined to listen. They’ve announced plans to join other companies such as Walmart Inc. and Adobe Inc. in publicly setting targets for the first time to reduce their emissions in line with the international Paris Agreement on ­climate. (Michael Bloomberg, founder and majority owner of Bloomberg LP, which owns Bloomberg Businessweek, is chairman of the Task Force on Climate-related Financial Disclosures, an effort to encourage corporate disclosure of ­environmental risk.)

Banks’ own operations, such as corporate offices and employee travel, aren’t the main issue when it comes to their greenhouse gas footprint. Climate activists are focused more on the emissions that banks help make possible with their loans and other services to companies. “Unless banking fundamentally changes its lending and underwriting practices with high-carbon emitters, it’s only paying lip service to Paris,” says Louise Rouse, a U.K.-based consultant to nonprofit campaign groups on climate change and finance. Many banks, reluctant to declare hefty carbon footprints, contend they shouldn’t have to shoulder responsibility for their clients’ emissions.

Financial institutions have trailed other ­i­ndustries in emissions disclosure, and they must catch up quickly, says Olaf Weber, a professor at Canada’s University of Waterloo who studies the financial industry’s impact on sustainable development. He predicts emissions data could be a key ­performance indicator “within just five years.” In the U.S., where activists say President Trump’s 2017 withdrawal from the Paris accord gave U.S. banks license to drag their feet, progress has been slow. French and Dutch banks have been the first to act.

ING is among a group of European banks that have said they will align their lending with the goal of keeping global warming below 2C (3.6F). Crouch is a Florida native based in the Netherlands—two places at risk from rising sea levels. She leads a five-person team within ING’s global sustainability unit. Her group examines clients’ physical assets, their output, and future production capacity. Then they calculate the emissions those businesses generate relative to the amount of financing the bank has provided them.

Beyond the challenge of tallying emissions, there’s the much more daunting task of ­cutting them. About 45 financial institutions globally, including the U.K.’s HSBC Holdings Inc. and France’s Société Générale SA, have committed to taking part in the Science Based Targets Initiative, a voluntary effort that sets reduction targets. Only four U.S. companies have made the commitment: insurer MetLife, asset manager Principal Financial Group, Hannon Armstrong, an investor in clean energy projects, and FullCycle Energy, a private equity firm.

Reporting should be mandatory, says Den Patten, a professor at Illinois State University’s ­college of business who focuses on ­corporate social responsibility and environmental ­disclosure. “The evidence suggests that voluntary disclosure regimes are not useful for eliciting comparable information and are used for image manipulation,” he says.

Despite ING’s emissions-measuring efforts, the bank is the Netherlands’ biggest lender to shale-gas and plastic companies, according to the Dutch Fair Finance Guide, a group that includes local chapters of Amnesty International and Friends of the Earth. ING spokesman Daan Wentholt says the bank no longer cooperates with research by the Fair Finance Guide because of concerns about its methodology.

Crouch says she’s sharing the lessons she’s learned about measuring emissions with ­counterparts at other banks. And despite the mammoth task of measuring her bank’s ­carbon footprint, she remains upbeat. That ING’s board has provided resources to the project, she says, “shows how this is going beyond a group of tree-huggers.” —With Emily Chasan and Eric Roston

To contact the editor responsible for this story: Pat Regnier at pregnier3@bloomberg.net

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