This report predominately uses information gathered from the 15 largest European Banks and establishes 6 themes of engagement. This one a kind survey analysed the banks according to their disclosure, alignment to the Paris Agreement and incorporation of the Task Force on Climate-related Financial Disclosure’s (TCFD) recommendations.

This is a follow on from the 2017 paper that noted that banks lacked alignment to the Paris objective of making finance flows consistent with low greenhouse gas emissions and climate-resilient development. The findings of this paper reports positive improvements, implementation of recommendations and greater interest in establishing leading practice have been adopted by banks.

Theme 1 is about climate-related disclosures and targets. TCFD’s emphasise disclosures and targets to promote market transparency and efficient capital allocation. TCFD use of carbon footprinting allows for analysis of financing activities towards carbon-related assets and opportunities. Overall, the objective is to reduce of carbon-related asset exposure and mobilise capital into low-carbon sectors. However, TCFD notes the challenge regarding the variation in reporting practices. A standardised methodology and placement need to be established to enable comparison and benchmarking.

• Banco Bilbao Vizcaya Argentaria (BBVA) is a prime example of leading practice. They emphasise the importance of senior decision-makers support, internal learning, and low-carbon transition by looking at the energy mix it its customer base.

Theme 2 is orientated around scenario analysis. Despite the low prioritisation of scenario analysis, it is extremely valuable in assessing the resilience of business strategies within different climate scenarios to inform strategic planning and portfolio composition. It allows for an understanding of physical and transitional climate risks.

• Credit Agricole use of P9XCA methodology which allocates GHG emissions to sources of finance, to assess the materiality of climate risks over dynamic time horizons. Essentially their scenario analysis has led to a shift their financing and lending criteria.
• Alternatively, UNEP FI TCFD’s scenario analysis works with multiple sectors, regions and circumstances. It highlights the transitional risk through analysis of the financial gain/loss relative to business-as-usual future state. Whilst physical risk is examined by the impact of extreme weather.

Theme 3 is focused on aligning sector policies with the Paris Agreement, which acts as a core document for client engagement.
Theme 4 demonstrates how client’s engagement can help manage transition risk by aligning their business models with low-carbon transition and TCFD recommendations.
For example: ABN AMRO has a progressive framework for engaging with clients to set clear objectives, timelines and outline consequences for non-compliance. ABN AMRO have engagement trajectory for clients that have poor sustainability but are willing and able to improve.

Theme 5 focuses on mobilising capital for low-carbon transition, which entails assessment their assets under management. Banks need to align their policies with the Paris Agreement by ceasing finance for emission-intensive industries; decarbonisation of their lending portfolios and creating timebound phase-out plan on existing projects. Not only are carbon-intensive industries destructive to the planet but also a high risk of becoming unprofitable due to changes to regulation, taxes, technologies and consumer preferences.

• BARCLAYS acknowledges the role to play in mobilising capital for the low-carbon transition.
  For example: they have a robust internal framework and integrity of low-carbon credentials and cross-business collaboration in product innovation.

Lastly, Theme 6 is about climate strategy, governance and education. Climate leadership will become ingrained in corporate culture through senior management support, coordinated plan and awareness across all divisions. BNP PARIBUS have successfully adopted this belief with senior management acting as a driving force, climate agenda expanding beyond CSR and having an education programme. Board-level oversight and including climate-related KPIs within incentive structures and senior remuneration and their incorporation of climate issues into governance structures.

1. Banks’ significant assets under management enable their actions to drastically influence the economy and business operations.
2. Banks have an increasing responsibility to act sustainably, by providing climate-related disclosures as well as financing and supporting climate-related opportunities.
3. The adoption and integration of the Paris Agreement and TCFD recommendations should act as a benchmark for investors, financiers and insurers to assess the businesses engagement with sustainability.
4. Not only does the alignment with TCFD and Paris Agreement make banks and businesses more attractive to invest in, but also assesses the resilience of the organisations through their climate-related risk mitigation and opportunity optimisation.
5. Given the lack of a mandatory and standardised reporting framework, benchmarking and comparing performance is challenging as examined by Theme 1. Banks can rely on the Paris Agreement and the TCFD recommendations as a base to grow their sustainable engagement.
6. Scenario analysis (Theme 2) helps strategy development for both different time horizons and environments and acts as a valuable tool when navigating capital for a low-carbon transition. Scenario analysis is not limited to banks, it can and should be used by investors and insurers in their sustainable finance practices.
7. Banks’ engagement with corporate clients (Theme 4) about climate-related issues has the ability to integrate sustainable finance throughout different markets and organisations. Banks should focus on making their own operations sustainability-oriented, and encourage their clients to do the same.
8. Additionally, Theme 4 can be enhanced by encouraging clients to embed the climate agenda within organisation strategy and governance. This will minimise the transitional and physical risks that companies would be exposed to.
9. Theme 5: Implement climate strategy aligned to Paris Agreement through managing and reducing exposure to non-Paris compliant sectors and mobilising capital to drive low-carbon transition. This will bring about significant change to banks’ financing activities and provides an opportunity to be adaptable towards a greener economy.
10. The shift towards becoming more sustainable needs to be instigated from within the organisation. Top management needs to set the tone at the top and then filtering throughout the bank and its business activities by enhancing organisational culture understanding across all divisions.