'Climate Principles' Refocuses Banks on Sustainable Behavior

Dec 4, 2009

One year on from the financial meltdown and a few days out from an international climate summit where financing for technology and adaptation will be major issues, the headlines are still full of news about bank bailouts, questionable banking practices and tight lending.

Even if the Copenhagen climate talks end with an eleventh-hour agreement on emissions, there's still the banking problem.

The Climate Group, an international coalition of governments and businesses, has been working for the past year on solutions to both in the form of the Climate Principles, a set of voluntary standards that binds participating banks to sustainable business practices, sustainable lending practices and environmental responsibility.

A year into the project, five major international banks have signed on to the Climate Principles: the world's two largest reinsurers, Munich Re and Swiss Re; its fifth- and sixth-largest banks, HSBC and Credit Agricole; and Standard Chartered, one of the largest banks in Britain.

The five are setting an example for the industry as they pioneer new products and services, said Emily Farnworth, a senior finance advisor of the Climate Group. More than that, she said, they are helping to firm up the now loose conceptualization of how banks can and should respond to climate change.

"Unless you're a financial sector organization, you're really in the weeds of understanding exactly what this all means," Farnworth told SolveClimate. "It's really difficult to put [climate change] into tangible terms.

"One of the things that the review will do is provide examples of the way banks have developed a new service, what kind of process that they have to engage with their clients, how they've been working with research institutions on specific challenges around climate change."

The products and services developed for climate change adaptation so far range from climate insurance policies to clean energy investment services.

Munich Re, for example, is working with Asian insurers to offer natural disaster insurance in areas at high risk for flooding. The reinsurer is piloting a system among its employees in which it provides interest-free loans to finance the purchase of electric vehicles and other low-carbon lifestyle solutions.

Swiss Re is working on rainfall indexed climate insurance to bolster farmers' incomes in countries at risk of extreme weather, piloting a project with the World Bank in Malawi.

Standard Chartered entered into a risk sharing agreement with the Asian Development Bank and Johnson Controls, an energy management firm, to retrofit buildings in China for energy efficiency.

Now in its one-year review of the project (an official progress report is expected before the Davos Summit in late January), The Climate Group is sussing out the obstacles its banks are facing as they implement the Climate Principles. PriceWaterhouseCoopers is conducting the independent evaluation and has designed the indicators, which are confidential until the report is released.

Farnworth is unwilling to make many predictions about the findings, but she will admit a few.

She expects the biggest challenge to be revealed in corporate sector banking, helping clients effectively manage risk and invest in the emerging low-carbon economy. Financing unproven, long-run return technologies like carbon capture and storage (CCS) is indicative of the challenge.

"The issue is for banks to understand — and it's an insurance issue as well — for them to understand where the technology risks are, where the opportunities are, and go away and figure out how to make that financially viable," she said.

"The question is to ... figure out where you can leverage public sector spending and where there needs to be a policy intervention. At the same time, where are there already private sector opportunities that can be a commercial reality?"

In retail banking, Farnworth predicts,

"We're only scratching the surface of what's likely to be possible in the longer term in terms of utilizing the completely dispersed but quite significant capital that individuals have as a collective group. I think that will be something we're going to see banks take a closer look at in the future."

Other gaps Farnworth hopes will be eliminated by an international climate change agreement.

"Particularly from a finance perspective, the importance of having regulatory targets to hit helps to guarantee. Making decisions without that is quite challenging," she said.

What's most needed, she said, is a better regulatory framework for the carbon market, a robust carbon price, and certainty on levels of public finance to help stimulate the private sector.

One already reported gap will be in HSBC's carbon footprint, which increased by 44% from 2005 to 2008.

"A lot of service sector organizations, there are some elements of their emissions they simply cannot dismiss, business travel being one of them, and therefore looking at offsetting whilst they're in the process of figuring out what green business travel might be in the context of not flying so often, etc., then that's going to be a reality," Farnworth said.

"In terms of the banks' own footprint — their business space, their office travel, etc. — it's obviously hugely dependent upon who they're buying or selling, what their status is as of buying or renting of properties, etc. There's obviously a significant commitment to reducing emissions in the context of becoming more energy efficient."

The social justice group BankTrack sees value in effort but argues that the Climate Principles don't go far enough to alter banking practices. The group would rather see banks refrain from further funding of nuclear and fossil fuel projects entirely, including CCS. Standard Chartered, for example, deals in pre-export oil loans to countries like Angola. The Climate Group itself is part of the Australian GCCSI initiative, designed specifically to fund CCS development.

The Climate Group recognizes that the principles are just a start — and that other banks are also making positive shifts toward environmental protection.

JP Morgan, for instance, has branches devoted to carbon offsetting. In Britain, the Co-operative Bank has taken an activist role in climate change and specificially states in its ethics policy: "We will not finance any business whose core activity contributes to global climate change, via the extraction or production of fossil fuels (oil, coal and gas), with an extension to the distribution of those fuels that have a higher global warming impact (eg tar sands and certain biofuels)."

Climate Group is in talks with other financial institutions to add their names to the Climate Principles, Farnwroth said, but she isn't expecting any immediate commitments. The remnants of the financial crisis are still a hindrance. Many banks and insurers are interested and supportive, she said, but they are making sure first that they are on stable ground and in a position to announce adoption.

 

See also:

Investing in Canada's Tar Sands Gets Sticky

Insurance CEOs Call on Industry to Get Proactive About Climate Change

Top Investors: World Needs Strong Climate Policies to Ensure Economic Growth

Study: Global Climate Adaptation Costs Will Be Far Higher than UN Estimates

Majority of Top Businesses Now Set Emissions Targets, But Still Seek Global Policy Direction

 

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