06/09/2021 Banks are adopting risk management practices that account for climate-related risks in response to growing recognition that climate change negatively impacts operations and revenues.
The Paris Agreement Capital Transition Assessment (PACTA) continues to help banking institutions steer their credit portfolios towards the Paris Agreement goals. In a recent Mazars benchmark study, Responsible banking practices: benchmark study 2021, 51% of the banks assessed currently align their financial portfolios with the Paris Agreement goals. However, the exact financial impact of climate change risk remains challenging to measure due to a lack of quantitative information. In fact, only 22% of the banks assessed can provide quantitative data on the materiality of climate risks.
Improve metrics and targets
While banks are making greater efforts to identify climate risks and investment opportunities, banks reporting under the Task Force on Climate-related Financial Disclosures (TCFD) standards can be hindered by the lack of detail concerning strategy, metrics and targets – according to our study.
GHG emissions fall under three scopes: scope 1 refers to all direct emissions; scope 2 relates to indirect emissions from consumption of purchased electricity, heat, or steam; scope 3 refers to all indirect emissions not covered by scope 2, including investment and finance.
Our study reveals scope 1 emissions are most commonly reported, while only 11% of the banks assessed disclose scope 3 emissions for their financing activities. This confirms the reporting challenge.
Develop a comprehensive climate risk reporting strategy
Establishing a strategy to improve the granularity and completeness of the information disclosed, particularly on scope 3 emissions, is vital to developing a comprehensive climate risk reporting regime. Alongside scope 1 and 2 emissions disclosure, it’s essential to calculate emissions from projects financed by companies with high carbon footprints, and investments made in businesses of the same category.
Banks should also consider how they can reduce financing of coal-fired power plants and maximise green finance opportunities to align climate risk goals and strengthen reporting strategies going forwards.
Equally, testing the effectiveness of disclosure and implementation strategies can strengthen banks’ reporting and improve their ability to measure performance against set goals.
Identify climate disclosure goals
Performing a portfolio analysis based on sectors, geographies, and types of financing can help produce relevant metrics and support the disclosure of emissions and indicators related to the Sustainable Development Goals.
Whether the strategy is to identify clean energy projects or provide homeowners with green mortgages to achieve an energy-positive mortgage portfolio, a deep analysis can shed light on the most relevant climate disclosure goals for each institution.
Such a strategy, when done well, can help develop expertise and confidence to apply scope 3 measurement methodologies to a broader range of sectors in a bank’s portfolio.
Getting granular on emissions information and subsequent disclosure will increasingly give banks the necessary tools to expand their sustainability reporting in line with TCFD recommendations. Notably, more comprehensive climate disclosure metrics puts banks at the forefront of improving environmental, social and governance reporting across all industries.