Major banks are facing increased public pressure to reduce financing for fossil fuel projects. In this decade of action for the UN Sustainable Development Goals (with a focus on SDG 13 – climate action), all sectors, including the financial sector, are urged to recognize the ways in which they impact these goals and how they can best contribute to their realization. But how are the top 10 most active banks in financing the fossil fuel industry responding to this pressure? Using qualitative textual analysis of these banks’ annual reports and a proposed categorization of how banks are talking about climate change, we highlight how these banks see their role in reducing climate impacts through their financing and whether their response has evolved since the Paris Agreement. We find that while these banks are stating an increasing number of climate change actions since the introduction of the Paris Agreement, there are few clear commitments in relation to their financing of fossil fuels. This absence of commitments in the annual reports may reflect an absence of critical reflection on their responsibility for financing climate change.
Climate-related financial risks (CRFR) are now recognised by central banks and supervisors as material to their financial stability mandates. But while CRFR are considered to have some unique characteristics, the emerging policy framework for dealing with them has largely focused on market-based solutions that seek to reduce perceived information gaps that prevent the accurate pricing of CRFR. These include disclosure, transparency, scenario analysis and stress testing. We argue this approach will be limited in impact because CRFR are characterised by radical uncertainty and hence ‘efficient’ price discovery is not possible.
Climate-related financial risks refer to the set of potential risks that may result from climate change and that could potentially impact the safety and soundness of individual financial institutions and have broader financial stability implications for the banking system. These risks are typically classified as physical and transition risks. Physical impacts include the potential economic costs and financial losses resulting from the increasing severity and frequency of extreme climate-change related events, and longer-term progressive shifts in the cliate. Transition impacts relate to the process of adjusting to a low-carbon economy.