Responsibility versus Materiality
Climate commitments made by banks vary in their level of ambition
Because of its influence on all other sectors, the banking industry plays a critical role in addressing the environmental and social challenges facing our world today. Each bank’s involvement in solutions will vary depending on each bank’s unique strategy, risk tolerance, and level of influence. However, there are a staggering number of commitments and coalitions that welcome any banks to participate. Which commitments are considered most ambitious? Here is a look at the level of rigor for a few of the top climate commitments for banks.
Climate-related disclosures allow each bank to set the scope
The first step for many companies in their journey to carbon management is to disclose their climate-related activity through CDP. This rigorous assessment provides a standardized framework for reporting carbon emissions and to demonstrate management of climate risks and opportunities. This reporting framework aligns with the recommendations made by the Taskforce for Climate-related Financial Disclosures (TCFD) to release material ESG information associated with the company’s governance, strategy, risk management, and metrics and targets. Companies are able to set their own parameters for determining materiality, and therefore could claim that no climate activity has a financial impact on their business. Until recently, the financial sector was considered under the broad “services” industry and was not required to disclose climate activity related to its financing activities themselves. A bank could disclose that their offices run on 100% renewables to demonstrate climate change leadership, while maintaining significant exposure to fossil fuels through their lending activities. This is no longer possible given the recent release of CDP’s specific financial sector questionnaire, but approaches will vary and this self-reported information may be weakly verified by third parties. As the industry navigates these challenges, there is room for this practice to mature in quality and improve in ambition.
Setting carbon emissions targets holds banks accountable
Within climate reporting, it is considered best practice to set and disclose emissions reduction targets. The most ambitious approach to target-setting is to do so in line with science. The Science-based Targets Initiative (SBTi) requires companies to include all three scopes of emissions in their targets and to reduce their emissions significantly enough to contribute towards a future world that remains under two degrees (celsius) of warming. The most challenging aspect of the financial sector methodology is Scope 3 emissions from financing activities. The Partnership for Carbon Accounting Financials (PCAF) has emerged as the gold standard for navigating the process of quantifying emissions from investing or lending activities. This year marks the official launch of the financial sector’s science-based targets methodology, so this is only the beginning. But given the public accountability associated with setting targets, participating banks will be held accountable for achieving their contribution to global emissions reductions.
Sweeping promises of responsible behavior leave plenty of loopholes
Many Corporate Social Responsibility (CSR) departments have absorbed the environmental sustainability work, but this leaves a lot of room to avoid the commitments and disclosures mentioned above. (Recall that climate disclosures are not required by the SEC.) Some banks may release annual Sustainability Reports, but others lump in their low-lift environmental efforts within their glossy annual CSR reports that also feature community volunteering efforts. Some banks may take their CSR very seriously, such as by going beyond Community Reinvestment Act (CRA) requirements and participating in Community Development Financial Institutions (CDFI) funds. Others may be eager to join broad initiatives, such as becoming a signatory of the Principles of Responsible Banking (PRB) without maintaining engagement with the criteria set by this global alliance.
The spectrum of commitments available to banks is almost as vast as the variety within the industry itself, so no one commitment is appropriate for all banks. However, when evaluating which financial institutions are truly leading in this space, be mindful of institutions focused on marketing and look for those rigorously assessing materiality of their absolute contribution to a sustainable future.
