Climate change will affect all facets of the financial services industry and all classes of investing. For investors and finance companies, it presents significant risks. It's likely to have a massive effect on the asset values and credit ratings of corporations. This means it will change the way banks deal with them. The sectors that will be most affected by climate change are obvious: infrastructure, transport, and energy. These can account for up to half the global financing needed in any given year, and that would run into hundreds of billions of dollars.
So how well prepared are the banks for climate change? There are some encouraging signs but they have a long way to go, according to a report from the Ceres investor coalition, Corporate governance and climate change: the banks.
On the plus side, the report found that the banks had issued nearly 100 research reports on climate change and related investment and regulatory strategies, more than half of them in 2007 alone, that 28 of the banks have calculated and disclosed their greenhouse gas emissions from operations and 24 have set some set some type of internal reduction target and that 29 had reported their financial support of alternative energy, eight of which alone have provided more than $12 billion of direct financing and investments in renewable energy and other clean energy projects.
But there were some big negatives.
Only a dozen of the 40 banks surveyed had board-level involvement. Worse still, all but one of those firms were non-US-based, hardly an encouraging sign from the world's biggest economy. Secondly, only a half-dozen banks said they were formally calculating carbon risks in their loan portfolios, and only one of the 40 banks – Bank of America – had announced a specific target to reduce greenhouse emissions associated with the utility portion of its lending portfolio. And finally, no bank has as yet set a policy to avoid investments in carbon-intensive projects such as conventional coal-fired power plants or Canadian tar sands.
Writing in Responsible Investor, Doug Cogan says there are some eerie similarities between climate change and sub-prime, namely that the banks seem to be failing to account for underlying risks to a huge class of assets.
"While the banking sector itself is not a big emitter of greenhouse gases that contribute to global warming, it is the primary financier of industries that are the major emitters," Cogan writes. "As regulatory controls and market prices are put on these emissions, this will have a tremendous influence on how banks price securities, assess credit risks and make future investment and lending decisions."
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