When it comes to climate change, some banks are doing better than others
You may have heard that one of the most effective things you can do as an individual to contribute to the climate transition is to switch banks. But is that really the case? What pressure can be put on banks today? Are some banks doing more for the environment than others? Let’s take a closer look.
Christine Marsal, University of Montpellier
In November 2023, in an open letter, nearly 1,200 students from French universities and grandes écoles formally pledged not to apply for job openings at the BNP Paribas Group. The reason given? The bank is involved in financing 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 the report, UN experts highlighted the harmful impact on the climate and human rights of the activities of the Saudi company Aramco, which is financially supported by a consortium of banks—including BNP Paribas—that provided a total of $7.6 billion between 2016 and 2022.
So, should we avoid this banking group in order to combat climate change? Are other banks doing better? Let's take a closer look.
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 thus emphasizes the central role of the financial sector in the path toward reducing greenhouse gas emissions. In particular, it sets as a priority the goal of making “financial flows consistent with a pathway toward low-greenhouse-gas-emission development that is resilient to climate change.”
Beyond the Paris Agreement, there are growing constraints being imposed on the banking sector that are contributing to several notable changes. But for a number of environmental activists, these new rules of the game are still “too little, too late.”
To try to assess this, let's start by looking at what constraints banks may face today.
What kinds of constraints might a bank face today?
Banks are subject to regulations that cover every aspect of an organization’s operations: human resources, information systems, customer management, financial management, and so on. These regulations are strongly guided by principles of prudence that every banker must adhere to.
It is summarized in the work of the Basel Committee, which brings together representatives from central banks in 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 an intermediary for European policy through the Prudential Supervision and Resolution Authority (ACPR).
If a bank fails to comply with the required ratios and procedures, it may be subject to fines or have its license revoked (in which case the bank must close). Its executives may also be held liable.
What are the possible penalties?
To ensure compliance with these obligations, the banking supervisory authorities in each country conduct regular on-site inspections at financial institutions. If irregularities are found, disciplinary sanctions may be imposed by the ACPR. The revocation of a license remains rare but serves as a strong deterrent: in 2010, this happened to a European private wealth management firm, and in 2019, to a currency exchange operator. Bans on conducting financial activities (insurance brokerage, over-the-counter currency exchange) are more common: 3 in 2012, 1 in 2014, and 3 in 2022.
Fines, on the other hand, can be very “hefty.” In 2018, for example, a fine of 50 million was imposed on La Banque Postale because its anti-money laundering and counterterrorism (LCBCLT) procedures were deemed noncompliant[1].
No penalties imposed for failure to address climate risks
And what does the Basel Committee say about climate change? Since 2018, it has recognized that credit risk is linked to climate risk. This recognition is leading all credit institutions to review their credit risk management policies: new criteria to be considered in financing agreements, climate risk included in the audit committee’s work, training for bank directors on climate risks, and the implementation of climate risk stress tests in the medium term.
To date, however, no penalties have been imposed on any French institution for failing to address climate risks, as the standards are still being developed.
A new requirement: the green asset ratio
In its annual work program, however,the ACPR plans to conduct a thorough review of the transition plans underway in the banking sector in 2024. The aim is to monitor the climate commitments published by banks under the Energy and Climate Law and the European Sustainable Finance Disclosure Regulation (SFDR). Starting in 2024, banks will be required to publish a new ratio—the green asset ratio (GAR)—which calculates the proportion of green assets (environmentally responsible financing and investments) relative to their total assets. In the case of BNP Paribas, the investment in Aramco mentioned in the introduction contributes to a decline in this ratio (this financing reduces the proportion of the bank’s green assets). It will now be easier for the public to understand the investment policies followed by a particular bank. https://www.youtube.com/embed/hxsplC0xPlY?wmode=transparent&start=0 An article in *Le Monde* examining the ties between Aramco and BNP Paribas.
However, several institutions have anticipated the publication of the GAR; for example, some of Crédit Agricole’s regional banks have been publishing this ratio since 2021.
The EU requires banks to disclose the carbon footprint of the investments they offer
On the EU side, since the launch of the European Green Deal, banks have been preparing to comply with new regulatory requirements. For example, since 2022, banks have been required to disclose to their clients the carbon footprint of the investments they offer. This requirement, which may seem trivial, nevertheless gives rise to paradoxical and potentially conflicting situations. Take, for example, a customer who, 15 years ago, purchased shares in a “conservative” mutual fund—one considered risk-free. However, the financial products that make up this fund may originate from polluting industries. In 2024, this “good” investment will therefore become a “bad” investment because of its carbon footprint. If the customer decides to change their investment, they may incur losses. If that happens, the bank will be accused of providing poor advice.
This situation therefore prompts financial institutions to exercise caution. A caution that can sometimes be seen as nothing more than unwillingness on the part of the banks. https://www.youtube.com/embed/40vLspK1UAs?wmode=transparent&start=0
But beyond the need to comply with new regulations, other factors may prompt banks to change their practices: the threats that climate change poses to the financial sector, and customer expectations.
Why Banks Have Legitimate Reasons to Be Concerned About Climate Change
Climate change is, in fact, considered a risk that could affect the economic and financial stability of entire geographic regions. Take, for example, a regional bank that specializes in financing the agricultural sector. Climate change (droughts/floods) leads to a loss of income for customers, which in turn results in loan defaults. However, the bank remains a financial intermediary; it lends money that does not belong to it (such as funds from customer savings accounts). In the event of widespread defaults among its farming customers, the bank will face difficulties in repaying its savers. At the same time, in accordance with the prudential principles of regulation, the bank will withdraw from the agricultural sector, which has become too risky. The investments needed for this sector’s climate transition will then be frozen, exacerbating the initial difficulties.
However, the consideration of climate risk at the individual portfolio level (as we have just described) is still considered too limited. The Veblen Institute, a French think tank that works to promote public policies in support of the ecological transition, proposes a sector-based approach to address this. This would involve, for example, banning financing 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 major banks have signed on. However, this alliance has set a target date of 2050 to achieve these goals, a timeline that major NGOs criticize.
Internally, what changes are taking place?
On the banking side, some institutions are innovating and seeking to improve existing tools to incorporate climate risk into their risk management. Between 2018 and 2019, Société Générale increased its staff dedicated to climate risk management by 50%; the CASA Group (Crédit Agricole) is assessing the level of expertise among its board members in climate-related matters and incorporating climate risk into its credit risk assessments…
It is also worth noting that no French bank appears on the list of the 12 banks most involved in financing the hydrocarbon industry. In this ranking, La Banque Postale is considered the most responsible, ahead of Crédit Mutuel and Crédit Agricole. Crédit Mutuel has, however, announced that it will step up its efforts in this area by refraining from financing companies listed by the NGO Urgewald.
Other institutions are developing tools to better measure the carbon footprint of the projects they finance (Crédit Agricole), or are implementing methodologies to better analyze environmental risks. However, these institutions face the challenge of collecting more non-financial data from their clients. Internal processes are not yet in place to collect such data on a large scale (e.g., the quality of industrial projects in terms of the ecological transition, the environmental impact of these projects, etc.). This challenge is illustrated by the AMF’s recent proposal to revise disclosure standards, advocating for clarification of concepts such as “sustainable investment.”
The next regulatory step will be to verify that the information disclosed by the banks is accurate and to impose sanctions when it is not.
Can customers help banks become more environmentally friendly?
In the meantime, banks may also be motivated to make their balance sheets greener to meet their customers’ expectations. However, an exploratory study conducted by management scientists De Lanauze and Siadou-Martin shows that customer demands remain ambiguous. “Banks’ perceived environmental concern is not a major expectation for consumers,” they note, before adding that, nevertheless,
"Consumers support—and even encourage—banks' environmental initiatives and communications."
These researchers therefore believe that these measures remain beneficial for banks, provided that two fundamental principles are observed:
"Environmental communication must be based on facts—that is, it must reflect a genuine commitment (requiring transparency and truthfulness)—and must not neglect the core business of banking."
Neobanks have understood this well, and companies like Hélios and Green-Hot, for example, are actively promoting the intermediary system they plan to implement: the savings they collect will never be allocated to projects that are harmful to the planet. Even if one considers that the reduction in funding for extractive activities or the disproportionate exploitation of forests is proceeding too slowly, the movement is real. However, it may sometimes seem insufficient in light of, for example, the projected consumption of the digital industry (GAFA, Fintech, and other digital institutions), whose carbon footprint remains largely overlooked.
Christine Marsal, Associate Professor (HDR), Management Accounting, Banking Governance, University of Montpellier
This article is republished from The Conversation under a Creative Commons license. Readthe original article.