Faced with climate change, some banks are better than others
You may have heard that one of the most effective things you can do as an individual to participate in the climate transition is to switch banks. But is this really the case? What can compel banks today? Are some doing more for the environment than others? Here's how.
Christine Marsal, University of Montpellier
In November 2023, in an open letter, nearly 1,200 students from French universities and grandes écoles formally undertook not to respond to job offers from the BNP-Paribas group. The reason given? The bank is associated with the financing of a controversial oil and gas extraction project. It was also cited in a report by a United Nations working group published in June 2023. In it, the UN experts highlighted the climate and human rights impact of the activities of Saudi company Aramco, financially backed by a collective of banks including BNPP, which provided a total of $7.6 billion between 2016 and 2022.
Should this banking group be avoided in the fight against climate change? Are other banks doing better? Let's find out.
The role of the financial industry in climate change
The banking sector is coming under increasing scrutiny for its role in climate inaction.
Article 2 of the Paris Agreement underlines the central role of the financial industry in the greenhouse gas reduction trajectory. In particular, it makes it a priority to make "financial flows compatible with a pathway to low greenhouse gas emissions and climate resilient development."
Beyond the Paris Agreement, there are growing constraints on the banking sector, contributing to a number of notable changes. But these new rules of the game remain "too little, too late" for a number of environmental activists.
To assess this, let's start by looking at what can constrain banks today.
What can constrain a bank today?
Banking establishments are subject to regulations covering all aspects of organizational life: human resources, information systems, customer management, financial management... These regulations are strongly influenced by the principles of prudence that all bankers must observe.
It is synthesized by the Basel Committee, which brings together central bank representatives from 45 countries, including the EU, and whose recommendations are implemented within the European Union by the European Central Bank. In France, the Banque de France acts as a relay for European policy via the Autorité de Contrôle Prudentiel et de Résolution (ACPR).
If a bank fails to comply with mandatory ratios and procedures, it may be fined, or have its approval withdrawn (the bank is forced to close). The bank's management may also be called into question.
What are the possible penalties?
To ensure compliance with these obligations, the banking supervisory authorities in each country carry out regular checks within the establishments themselves. If irregularities are detected, the ACPR may impose disciplinary sanctions. Withdrawal of authorization remains rare, but highly dissuasive: in 2010, this was the case for the société européenne de gestion privée, and in 2019 for a money changer. Bans on financial activities (insurance intermediation, manual foreign exchange) are more common: 3 in 2012, 1 in 2014, 3 in 2022.
Fines, meanwhile, can be very "steep". In 2018, for example, a 50 million fine was imposed on Banque Postale, whose anti-money laundering and counter-terrorism (AML/CFT) procedures were not deemed compliant[1].
No penalties imposed for non-compliance with climatic risks
And what does the Basel Committee have to say about climate? Since 2018, it has recognized that credit risk is associated with climate risk. This recognition is leading all credit institutions to review their credit risk management policies: new criteria to be taken into account in the financing agreement, climate risk included in the work of the audit committee, climate risk training for bank directors, implementation of climate risk stress tests in the medium term.
To date, however, no French establishment has been sanctioned for non-compliance with climate risks, as the standards are still being drawn up.
A new constraint: the green asset ratio
In its annual work program for 2024, however, theACPR is planning a close examination of the transition plans undertaken in the banking sector. The aim is to monitor the climate commitments published by banks under the French Climate Energy Act and the European Regulation (SFDR). From 2024, banks will be required to publish a new ratio (the green asset ratio or GAR), which involves calculating the share of green assets (environmentally responsible financing and investments) out of their total assets. In the case of BNPP, the investment in Aramco mentioned in the introduction contributes to the deterioration of this ratio (this financing reduces the green share of the bank's assets). From now on, it will be easier for the general public to find out about the investment policy of any given bank. https://www.youtube.com/embed/hxsplC0xPlY?wmode=transparent&start=0 Le Monde reports on the links between Aramco and BNP Paribas.
However, several institutions have anticipated the publication of the GAR, with some Crédit Agricole regional banks publishing this ratio as early as 2021.
EU requires banks to disclose the carbon footprint of their investments
On the EU side, since the launch of the European Green Pact, banks have been preparing to meet new regulatory constraints. For example, since 2022, banks have been required to disclose to their customers the carbon footprint of the investments they offer. However, this seemingly innocuous step conceals paradoxical and potentially conflictual situations. Let's take the example of a customer who, 15 years ago, subscribed to shares in a "father-of-the-family" mutual fund, i.e. one that was deemed risk-free. However, the financial products that make up this fund may emanate from polluting industries. In 2024, this "good" investment becomes a "bad" investment because of its climate footprint. If customers decide to change their investment, they may incur losses. If this happens, the bank will be accused of giving bad advice.
This situation has prompted banks to adopt a cautious approach. A caution that can sometimes be seen as a sign of unwillingness on the part of banks. https://www.youtube.com/embed/40vLspK1UAs?wmode=transparent&start=0
But beyond the need to comply with new regulations, other motivations may lead banks to change their practices: the threats posed by climate change to finance, and customer expectations.
Why banks can legitimately worry about climate change
Climate change is seen as a risk that can affect the economic and financial stability of entire geographical areas. Let's take the example of a regional bank specializing in financing the agricultural sector. Climate change (drought/floods) leads to a loss of income for customers, which in turn leads to default. However, the bank remains a financial intermediary, lending money that does not belong to it (customers' passbooks, for example). In the event of a massive default by its farmer customers, it will have difficulty repaying its saver customers. At the same time, following the prudent principles of regulation, the bank will turn away from the agricultural sector, which has become too risky. The investments required for the sector's climate transition will then be frozen, reinforcing the initial difficulties.
Taking climate risk into account at the level of individual cases (as we have just described) is, however, still considered too timid. The Institut Veblen, a French think-tank that promotes public policy in favor of ecological transition, proposes a sector-based approach to remedy this. This involves, for example, banning funding for entire sectors (mining, oil extraction, etc.). These objectives are already included in international alliances such as the Glasgow Financial Alliance for Net Zero, to which all the major banks have subscribed. However, this alliance has set itself the target date of 2050, which the main NGOs deplore.
What are the internal changes?
On the banking side, some institutions are innovating and seeking to improve existing tools to integrate climate risk into their risk management. Between 2018 and 2019, Société Générale is increasing the number of staff dedicated to climate risk management by 50%; the CASA group (Crédit Agricole) is measuring the degree of climate expertise of its directors, introducing climate risk into credit risk assessment...
It's also worth noting that no French bank features in the list of the 12 banks most involved in hydrocarbon financing. In this ranking, Banque Postale is considered the most virtuous, ahead of Crédit Mutuel and Crédit Agricole. However, Crédit Mutuel has announced that it is stepping up its efforts in this area by refraining from financing companies listed by the NGO Urgewald.
Other establishments are developing tools to better measure the carbon footprint of projects financed (Crédit Agricole), or implementing methodologies to better analyze environmental risks. However, these establishments are encountering difficulties in collecting more non-financial data from their customers. Internal processes are not yet operational to collect such data en masse (quality of industrial projects in terms of ecological transition, environmental impact of these projects, etc.). This difficulty is illustrated by the AMF's recent proposal to review publication standards, advocating clarification of the concepts of "sustainable investment", for example.
The next regulatory step will be to verify that the information disseminated by the banks corresponds to reality, and to impose sanctions where this is not the case.
Customers who can help banks go green?
Meanwhile, banks may also be motivated to green their balance sheets in response to customer expectations. An exploratory study conducted by management science researchers De Lanauze and Siadou-Martin shows, however, that customer demands remain ambiguous. "The perceived environmental concern of banks is not a major expectation for consumers", they note, before adding that, for all that,
"Consumers support and even encourage banks' actions and communications in favor of the environment".
These researchers therefore consider that these actions are still beneficial for banks, provided that two fundamental principles are respected:
"Environmental communication must be based on facts, i.e. it must reflect a genuine commitment (transparency and veracity) and not neglect the core business of banking services".
Neobanks have understood this, and Hélios and Green-Hot, for example, communicate extensively on the intermediation circuit that will be put in place: the savings collected will never be allocated to projects that are harmful to the planet. Even if we consider that the reduction in the financing of extraction activities or disproportionate exploitation of forests is too slow, the movement is real. However, it may sometimes seem insufficient, given, for example, the consumption forecasts of the digital industry (GAFA, Fintech and other digital establishments) , whose carbon footprint is still largely ignored.
Christine Marsal, HDR Senior Lecturer, Management control, bank governance, University of Montpellier
This article is republished from The Conversation under a Creative Commons license. Read theoriginal article.