Governance, risk & compliance
Some banks have been very open about their exposure to climate risk and are taking steps to address both physical and transition risks. Deutsche Bank, for example, is facilitating over €200bn in sustainable financing and investments by 2023 to support sustainable economic development. It is also working to align its credit portfolios with the goals of the Paris Agreement, which encompasses a commitment to introducing methods of measuring climate impact by the end of 2022. Deutsche Bank also plans to end global business activities in coal mining by 2025.
“Only through engagement with our clients are we able to detect the right risks and, with that, also support them in becoming more resilient.”
Perhaps the bank with the most comprehensive plan, however, is ING. As part of its commitment to developing an industry-wide standard for climate risk and increasing transparency around its activities, in 2018 it signed up to the Katowice Commitment. A pledge to steer portfolios towards the well-below two-degree goal of the Paris Climate Agreement, the commitment was also signed by BBVA, BNP Paribas, Société Générale and Standard Chartered. In 2019, this laid the foundation for the UN-backed Collective Commitment to Climate Action, signed by ING and more than 30 other banks that together represent $13tn in loans. More recently, ING has helped to shape the Net-Zero Banking Alliance and the accompanying guidelines for target-setting. All of this is part of its so-called Terra Approach, which seeks to measure climate risk in new and innovative ways that go beyond traditional measures of risk – by creating detailed scenarios for how the bank and its clients can achieve decarbonisation.
70% ING 44
Steering the world to zero carbon Thanks to carbon offsetting, ING’s own operations have been carbon neutral since 2007, though the bank still continues to lower its greenhouse gas emissions across its buildings and business travel requirements. As a result, the key thrust of the Terra Approach is the effort to align ING’s €700bn lending portfolio with a net-zero future by 2050 (or sooner). Initially, this involves creating a loan book that will help to keep the rise in global temperatures to a maximum of 1.5°C.
Mix of renewables in the global power mix by 2040.
“While the decarbonisation pathways foresee a rather linear decrease in emissions, we believe a paradigm shift is more likely once low-carbon alternatives become commercially viable and scalable, which is not yet the case,” believes Castelnau. “But progress is being made and more
and more capital is being allocated to further these technologies. Overall, our Terra Approach provides much-needed transparency to carbon-intensive sectors, and we continue to take a proactive role in supporting our clients to transform their business models as well as calling on governments to create the right incentives and policy environment.” In practical terms, ING is aiming for an energy- positive portfolio in both its Dutch commercial real estate portfolio in the Netherlands and its mortgage lending. It will also reduce financing to coal power generation to nearly zero by 2025 – and review lending to the power generation, automotive, shipping and aviation industries, among others. “As a bank, we are a participant in the real economy and believe in dialogue and transition over exclusion,” says Castelnau. “That’s why we choose to be part of the solution by providing transition finance for best-in-class assets and by developing industry- guiding standards. And for some sectors, we see a decrease is necessary. For instance, we aim to decrease funding to upstream oil and gas by 12% by 2025, which is a new, intermediate target that can help us steer and be held accountable.” The Terra Approach heavily relies on analysing scenarios that ING’s economics department have developed from policy and technology drivers. The bank created four short to medium-term scenarios, choosing the two most extreme examples to translate into financial risks and business decision- making processes.
In the automotive sector, for example, the bank measures the current mix of clients’ production of internal combustion engine vehicles compared with zero-emission vehicles and how clients plan to shift this balance over time. This can be compared with the projections made by the scientific community about how the automotive sector might seek to transition to net-zero carbon by 2050, and tracking each client’s progress along that pathway. “What we learn helps us make our business decisions,” Castelnau explains. “And how we do this continues to evolve in line with developing regulations and methodologies. This is why our inclusive approach around climate change is so important. Only through engagement with our clients are we able to detect the right risks and, with that, also support them in becoming more resilient.”
Banks, in short, are not simply waking up to the broad notion of climate change. Rather, they are fully engaged with the detail of climate risk. More to the point, they not only manage their own environmental impact, but also battle to steer their lending activities towards a carbon neutral future. Though there is certainly a long way for the financial services industry to go, in other words, it has set out on the journey with purpose. ●
Future Banking /
www.nsbanking.com
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