This report is based on the power that lending institutions have through the funding of clients. It outlines why they should be using this power to prevent climate change, and provides a framework to support lending institutions in decarbonisation. The impetus for the report comes from the impact that climate change will have on these institutions.

Taking responsibility for climate risk

Climate change is likely to drastically increase the consequence of environmental risks, as well as social, political, and systemic risks. Lending institutions should be incorporating this into their decision making, and reporting on how their contribution to climate change through lending practices is affecting these risks.

The impact that climate change poses to lending institutions is broad:

• It is almost certain risks will materialise due to climate change, predicting how these interact is less certain
• It will be impossible for governments to “bail-out” the economy in the event of a climate-related crisis
• The longer action is delayed, the larger likely climate financial shocks will be
• Improving non-financial impacts can lead to financial outperformance
• A failure to mitigate these risks is reckless

Being accountable for climate impact

Lending institutions need to protect the climate via their lending, to also protect themselves from the changing climate. The majority of the carbon emissions of lending institutions will be from the clients they lend to and the related supply chain. 

Lending institutions should set a public target for reducing climate emissions through their lending. This will prompt strategies to reduce emissions, improve targets, and bring attention to the process. 

Stopping the flow to fossil fuels

The place for lending institutions to start addressing climate change, is to stop financing fossil fuel extraction. Many banks have announced commitments in this direction, but policies on this still operate at various levels of comprehensiveness.

Important priorities should include:

• No longer providing discounted lending to large fossil fuel companies
• No increase in investment in fossil fuel services
• Consideration for new technology to strand fossil fuel assets
• Ensuring sustainable finance targets are greater than the amount of fossil fuel funding an institution provides
• Consideration of deforestation in a similar context to fossil fuels

Decarbonising economies and balance sheets

The report provides a framework for lending institutions to think about how they decarbonise. The development of this strategy should not be isolated from other social and environmental issues.

An overview of the climate-safe lending strategy tool kit:

• Creating decarbonisation approaches for each sector that is funded
• Using leverage over clients to require and scrutinise decarbonisation plans
• Networking decarbonisation strategies, both between clients and peers
• Supporting clients’ sustainable practices and products
• Leading by example with their own operations
• Advocating for sustainable practices with clients, investors and the public

Financing innovation for a sustainable future

Allocating a meaningful and true value to the environment and living creatures, will allow a variety of new investments in conservation to become possible. Emission-free technologies already exist, and while predicted implementation is lower than actual adoption, further financing for these technologies can drive increased utilisation.

1. Lending to the most damaging climate contributing industries needs to be halted, and there is a big role for finance in accelerating the transition to decarbonisation.
2. Lending institutions have significant agency and influence with their business clients. Loan conditions, if breached, can lead to a default situation that clients are highly motivated to avoid. And given that many business expansion plans are contingent upon continued and additional credit, the bank-client relationship is very important for the future development of any company.
3. Climate change is generally framed as an environmental issue, but cannot be separated from its systemic social context. The physical and transition risks of climate change will not be evenly distributed. It is essential that social justice is fully integrated into how banks consider a just transition to an inclusive green economy.
4. Climate change poses significant risks to the world, including to lending institutions. Financial institutions should use their leverage to decarbonise the economy and minimise climate change risks.
5. Each lending institution should come up with its own tailored strategy to ensure decarbonisation across all scopes of emissions within their value chain.
6. Available science, innovation and new technologies should all be used to inform this strategy and to minimise the lending institution’s risk.
7. Important steps are being taken across the financial sector, from financial institutions to regulators. Over 170 banks endorsed the UN Principles for Responsible Banking in September 2019 whose first principle includes the “alignment of business strategy [to…] the Sustainable Development Goals [and the] Paris Climate Agreement.”
8. A triple-A bank of the future will: anticipate risk by using not just the past but reality-based expectations; add value by optimising the social, environmental and economic value they produce; and, act now to develop a positive environmental strategy with the urgency that climate change requires.
9. Climate catastrophes are even more serious than most systemic financial crises; they could pose an existential threat to humanity, as increasingly emphasised by climate scientists.