Are Europe’s Financial Firms Change-Takers or Change-Makers?
October 04, 2023
This was the question posed by Eric Usher, Head of the United Nations Environment Programme Finance Initiative (UNEP FI) to leading banks and insurers at the initiative’s European Roundtable in Madrid last week. Here’s a brief note on the issues that most concerned financial sector Chief Sustainability Officers and Heads of Sustainable Finance in responding to this question. FTI Consulting’s Wendy Dobson, Senior Managing Director for Sustainability and ESG in Financial Services, participated in the event – please reach out if you would like more detailed insight into the debates.
Transition finance emerged as the leading topic of the roundtable. The central message was that carbon-intensive sectors need funding for their decarbonisation journeys and that a focus on metrics like the Green Asset Ratio was too simplistic and unhelpful. The chairs of BBVA, Santander, Caixa Bank and MAFPRE urged stakeholders including regulators to recognise this reality. A globally consistent approach to defining and measuring transition finance is needed.
‘If we don’t push for a just transition, there won’t be a transition’ was the rallying call of a panel discussion on the role of financial institutions in ensuring that no group was left behind as economies decarbonise. More attention on the socio-economic impact of the energy transition was urgently needed including job losses, increased energy prices, and threats to traditional ways of life amongst indigenous communities. Financial firms needed to include this in their client engagements. The proposed EU Social Taxonomy was seen as playing an important role in delivering inclusive and sustainable growth.
Integrating Sustainability in Investment Banking
BNP Paribas, Caixa Bank and Santander shared useful insights into how their clients are driving the integration of sustainability in Investment Banking. Clients want their bank to partner them on their energy transition and sustainability strategies through advice, innovative funding solutions, and providing deep expertise to exploit opportunities in new green technologies. Ingredients for success included strong partnerships between front office and sustainability teams, investment in talent, and carefully managing greenwashing risks for both the bank and its clients.
Climate Risk and Capital Management
The ECB said that banks had further to go to integrate climate risk into their risk governance and management practices. It called on banks to see enhanced climate-related financial disclosures as part of their Pillar 3 capital disclosures. Physical risks from more frequent extreme weather events and the flow through risk to financial stability was of particular concern to the ECB, and climate stress-testing remained a priority.
Finance and Nature
Ahead of the launch of the Recommendations of the Taskforce for Nature-related Financial Disclosures at New York Climate Week this week, participants were keen to talk about nature and biodiversity. While everyone agreed that economic dependency on natural capital was a material risk, and noted that biodiversity had risen up the corporate agenda, there was a note of caution about financial firms’ ability to properly measure and disclose these risks. Nevertheless, larger firms had started identifying what one leading bank called the nature and biodiversity ‘no fly zones’ in their lending policies, while others had appointed dedicated Chief Nature Officers. Several banks had started this work with their agricultural clients.
Principles for Responsible Banking 2030
Four years since the launch of the UN Principles for Responsible Banking (PRB), which has more than 330 signatory banks, a core group of signatory banks are working on PRB 2030. They want to safeguard the relevance of the PRB framework as the collective ‘North Star’ for responsible banks around the world. Building on the lessons from four years of implementing the PRB, practical guidance is being developed on internal change management, operating models, client engagement, and responsible advocacy. The next evolution in responsible banking will be launched in 2024.
Other topics that got participants talking included Climate Adaptation Finance, data quality and usability, circular economy, ongoing proliferation of initiatives and alliances, forthcoming regulatory requirements on disclosure and supply chain due diligence and the implications for financial firms. Many of those responsible for leading this work in banks and insurers lamented their ever-growing in-boxes and the challenges of keeping pace with an accelerating sustainable and responsible finance agenda.