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 prestigious higher education institutions formally pledged not to apply for job openings at the BNP Paribas Group. The reason cited? The bank is involved in financing a controversial oil and gas extraction project. It was also mentioned in a report by a United Nations working group published in June 2023. In it, 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, which 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 highlights the central role of the financial sector in achieving greenhouse gas emission reduction targets. In particular, it sets as a priority the goal of making “financial flows consistent with a pathway toward low-greenhouse-gas-emission and climate-resilient development.”
Beyond the Paris Agreement, there are growing constraints being imposed on the banking sector that are driving several significant changes. But for many environmental activists, these new rules of the game amount to “too little, too late.”
To try to assess this, let’s start by looking at what constraints banks face today.
What 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 more. These regulations are strongly guided by principles of prudence that all bankers must adhere to.
It is shaped by 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 mandatory 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 face legal action.
What are the possible penalties?
To ensure compliance with regulatory requirements, 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 occurred with a European private wealth management firm; in 2019, with 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, 3 in 2022.
Fines, on the other hand, can be quite hefty. In 2018, for example, a fine of 50 million was imposed on La Banque Postale because its anti-money laundering and counter-terrorism financing (AML/CTF) procedures were deemed non-compliant[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 relevant 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 implemented 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, or 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 worsening this ratio (this financing reduces the green portion of the bank’s 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 A report by Le Monde examining the ties between Aramco and BNP Paribas.
However, several institutions have already begun reporting the GAR; for example, some regional branches of Crédit Agricole have been publishing this ratio since 2021.
The EU requires banks to disclose the carbon footprint of the investments they offer
In the EU, since the launch of the European Green Deal, banks have been preparing to comply with new regulatory requirements. For instance, starting in 2022, banks must disclose to their clients the carbon footprint of the investments they offer. While this requirement may seem straightforward, it can lead to paradoxical and potentially conflicting situations. Consider the example of a client who, 15 years ago, purchased shares in a “conservative” mutual fund—that is, one considered risk-free. The financial products that make up this fund may, however, originate from polluting industries. In 2024, this “good” investment therefore becomes a “bad” investment due to its climate footprint. If the client decides to change their investment, they may incur losses. If this happens, the bank will be accused of having provided poor advice.
This situation is therefore prompting 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 Good Reason 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 specializing in financing the agricultural sector. Climate change (droughts/floods) leads to a loss of income for customers, which in turn results in defaults. Yet the bank remains a financial intermediary; it lends money that does not belong to it (such as customer savings accounts). In the event of widespread defaults by its farming customers, it will struggle to repay its depositors. 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 the sector’s climate transition will then be frozen, exacerbating the initial difficulties.
However, the current approach to addressing climate risk at the individual project level (as described above) is still considered too timid. The Veblen Institute, a French think tank dedicated to promoting public policies that support the ecological transition, proposes a sector-based approach to address this issue. This involves, 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, which all major banks have signed on to. But this alliance has set a target date of 2050 to achieve this, a timeline that major NGOs deplore.
What changes are taking place internally?
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 workforce 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 fossil fuel 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 (such as 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 operational for collecting such data on a large scale (the quality of industrial projects in terms of the ecological transition, the environmental impact of these projects, etc.). This difficulty is illustrated by the AMF’s recent proposal to review disclosure standards by advocating for a 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 green their balance sheets to meet their customers’ expectations. However, an exploratory study conducted by management scientists De Lanauze and Siadou-Martin shows that customer demands remain ambiguous. “Consumers do not view banks’ perceived environmental concern as a major expectation,” they note, before adding that, nevertheless,
"Consumers support—and even encourage—banks' environmental initiatives and communications."
These researchers therefore believe that such actions 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 clearly understood this, and companies like Hélios and Green-Hot, for example, are actively promoting the intermediary framework they plan to establish: the savings they collect will never be allocated to projects that harm the planet. Even if we consider that the reduction in funding for extractive activities or the disproportionate exploitation of forests is too slow, the movement is real. It may, however, sometimes seem insufficient in light of, for example, the projected consumption of the digital industry (GAFA, Fintech, and other digital firms), whose carbon footprint remains largely unknown.
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.