More than half of syndicated lending of major U.S. banks is exposed to climate risk, potentially leading to significant losses for the banking sector and the broader economy.
Calls grow louder for U.S. banks to set Paris-aligned emissions reduction targets in the coming year.
The U.S. banking sector is far more exposed to the systemic and financial risks of climate change than previously understood by investors or disclosed by banks—according to a major new report released today from the Ceres Accelerator for Sustainable Capital Markets.
Financing a Net-Zero Economy: Measuring and Addressing Climate Risk for Banks provides a first-of-its-kind assessment of the loan portfolios of U.S. banks, and finds that more than half of syndicated lending of major U.S. banks is in climate-relevant sectors of the economy and is, therefore, vulnerable to the risks posed by climate change. It finds that banks have an imperative to disclose these risks, which could subject them to major lending losses in the event of a sudden and dramatic change in public, regulatory, or investor sentiment. These losses could send destabilizing waves across the economy.
“Our future depends on banks’ understanding of and disclosure of their exposure to major risks like climate risk.” said Steven M. Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets. “The U.S. banking sector’s current lending and disclosure practices are leaving them—and in turn, all of us—dangerously vulnerable to the impacts of climate change. Banks have a strong strategic incentive to better account for, disclose, and mitigate climate risks. While there is growing interest in acting on climate risks from U.S. financial regulators, banks have an opportunity to act on these risks now, without waiting for policy or regulatory change. They can help prevent the next financial crisis, and in so doing improve their competitive position and, ultimately, their financial results.”
It is widely understood that banks are exposed to both the physical risks associated with climate change and the transition risks caused by the failure to prepare for the associated shift away from fossil fuels. But, as the analysis shows, the current view of transition risk in the banking sector is incomplete, focusing only on banks’ direct loans to the fossil-fuel sector. A full assessment must take into account a bank’s financing of industries that rely heavily on fossil fuels as inputs as well -- including agriculture, manufacturing, construction, transportation and the financial sector itself.
The Ceres Accelerator report finds that each of these sectors is exposed to climate risk, and that the financial sector is particularly exposed, as the interconnected nature of the financial system means that banks could face climate-related losses from interbank lending and even “fire sales” of distressed high-carbon assets. When taking into account this more complete assessment of climate risk, banking sector losses, as the result of an unplanned climate transition, could be many times higher than current disclosures indicate.
“It’s time to usher in a new era of climate risk analysis, assessment and mitigation in the banking sector,” said Dan Saccardi, Senior Director, Company Network, Ceres. “It’s not just about lending to one company or one sector. It’s about the way climate impacts the entire system—and therefore, the entire portfolio. There’s no diversifying or hedging these risks unless we understand the full scope of them. Banks must recognize climate risks across their portfolios, disclose them, and act to mitigate them.”
The report makes 13 recommendations that banks can act on right now to assess and mitigate their exposure to climate risks, including that they:
- Improve their existing climate risk analysis tools and methods,
- Require bank clients to provide more data in key climate-related areas,
- Develop risk management techniques like stress testing and scenario analysis, and
- Build climate risk into day-to-day decision-making tools such as client earnings models.
Finally, the report recommends that banks act to mitigate their exposure to climate risk by setting and disclosing financing portfolio targets that are aligned with the most ambitious goals of the Paris Climate Agreement, including detailed interim targets and specific timelines for sectoral portfolios to reach net-zero emissions.
“This report’s findings are not the final word,” the report states. “By improving client selection and engagement, banks can lower their risk, create new upside, and help propel the transition to a zero-carbon economy. That will, in turn, minimize risks to financial stability and the entire banking sector, and help catalyze more momentum to curb the most severe impacts of climate change.”
Major U.S. banks Morgan Stanley and JPMorgan Chase recently announced net-zero and Paris-aligned emissions targets, respectively—making encouraging progress toward, but not yet reaching, the type of cross-portfolio, Paris-aligned target this report calls for.
In recent months, climate risk has been elevated as a systemic risk to financial markets by concerned investors, lawmakers, and some financial regulators, as more and more market influencers come to understand the systemic, compounding risks posed by climate change. Another Ceres Accelerator report released earlier this year called for financial regulatory agencies to better understand climate risk and supervise the financial institutions they’re charged with regulating so that they act on climate risk as well. That report’s recommendations have been echoed in subsequent reports from the Senate Democrats’ Committee on the Climate Crisis, and by the Market Risk Advisory Subcommittee of the Commodity Futures Trading Commission.
The Ceres Accelerator will host a media briefing at 10:00 a.m. ET on Monday, October 19 to discuss Financing a Net-Zero Economy: Measuring and Addressing Climate Risk for Banks and answer questions from reporters. The briefing is open to the media only. Please contact Troy Shaheen at email@example.com to RSVP and receive dial-in information.
The Ceres Accelerator will also host a public webinar to discuss the report’s findings at 2:00 p.m. ET on Tuesday October 20, with the following speakers:
- Paul Bodnar, Chair of the Center for Climate-Aligned Finance, Rocky Mountain Institute;
- Alex Liftman, Global Environmental Executive, Bank of America;
- Brian Schatz, U.S. Senator (D-HI); and
- Betty Yee, California State Controller, Board member CalPERS & CalSTRS. That webinar is free and open to the public.
- Dan Saccardi, Senior Director, Company Network, Ceres
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