EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE 

ShareAction on climate and biodiversity practices of Europe’s largest banks

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BRUSSELS, 30 November 2021

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ShareAction has published a ‘leading practice’ report, ‘Countdown to COP26: An analysis of the climate and biodiversity practices of Europe’s largest banks’, discussing how the 25 largest European banks approach five critical climate and biodiversity-related themes, namely:

• Net-zero targets and alignment
• High-carbon disclosures
• Sector policies (fossil fuels, shipping, biomass)
• Biodiversity
• Executive remuneration

The objective of the report is to provide a benchmark for banks to better understand where they stand and how to draw inspiration from leaders in the industry while at the same time identifying where there is still room for improvement amongst the leaders. The report also suggests some questions that investors can use to drive engagement with banks and understand their climate and biodiversity practices.

We chatted with ShareAction’s Xavier Lenin and Jeanne Martin, authors of the report, who provided further insight on the objectives and main conclusions drawn from ShareAction’s ‘leading practice’ report.

What is the main objective of ShareAction’s report and why was it necessary at this particular point in time?

One of the main reasons for this report is to catalyze ambitious climate and biodiversity commitments from the banking sector. In the context of COP26, banks, as well as companies, have been updating their positions on climate change. Against this background, ShareAction wants to provide an overview of the most important issues for civil society and investors. A second objective is to show what banks are already doing to address these issues. The report finds that it is possible for banks to increase the ambition of their current policies and encourages them to draw inspiration from leading practice. Leading practice is, however, not equivalent to best practice and so with this guide, we also want to identify next steps for individual banks and the sector as a whole to further improve.

How does ShareAction interact with members of civil society and investors and assess priorities from the perspective of these groups? What feedback was received in terms of expectations and further action needed from banks?

On the civil society front, ShareAction often partners with NGOs that do work related to banks through ShareAction’s European Responsible Investment Network as well as through other forums. Many civil society organizations have brought attention to banks’ long-term ambitions to net-zero and the need for these to be supplemented with shorter-term commitments that are aligned with 1.5­°C pathways and do not excessively rely on negative emissions. This topic is big not only amongst civil society but also within the investor community. In July 2021, ShareAction coordinated a letter to global banks signed by 115 investors representing $4.2 trillion in assets. The letter includes key concerns directed towards banks in relation to climate and biodiversity in the attempt to catalyze action in the banking sector ahead of COP26 and many of these same concerns are reflected in the report. The letter echoes the previously mentioned request for shorter-term commitments as well as for other elements including fossil fuel policies, phase-out of coal, and the approach to biodiversity.

What is the perspective of investors when directing the concerns outlined in the report to banks?

Investors perceive banks as the lifeblood of the economy and believe the banking sector has the power to determine whether the goals of the Paris Agreement will be met as their financing decisions play a huge role in the transition. Moreover, the banking sector is considered quite unique in the sense that many of the climate-related risks that it will face might not necessarily materialize today, in contrast to other sectors which are starting to feel the heat already. In reality, banks are already facing some risks today. To give an example legal, risks are growing, and investors are increasingly interested in how the banking industry is aligning itself to the Paris climate goals. Investors may, however, not have a sense of the actual transition risk currently faced by banks because of the lack of standards to assess their approach to these transition risks. The report, therefore, attempts to build a bridge between investors and banks by not only providing an overview of what banks are currently doing but also by suggesting a list of engagement questions that investors can use in their interaction with banks.

What are the key observations in the report in terms of what is going well and what is not?

In terms of net-zero targets and alignment, what banks are doing well is putting in place high-level ambitions: 20 of the 25 European banks covered in the report have already set ambitions to reach net-zero by 2050[1]. What tends to be lacking is the creation of concrete plans to get there. When considering high carbon disclosures, banks have demonstrated progress by disclosing exposures to high-carbon activities in general. A point of improvement would, however, be to provide a breakdown of their exposure to specific fossil fuel segments.  The report then finds that, with regards to fossil fuel policies, banks have been making progress in restricting financing to some projects, but on the other hand, have been more reluctant to restrict financing to corporate clients across the value chain. The report also finds that a minority of banks assessed have committed to a full phase-out of the most carbon-intensive fossil fuels like thermal coal. When assessing banks’ approach to biodiversity, it was revealed that the discussion is still at an initial stage in many cases. On the other hand, banks have started to look into the shipping sector with several banks committing to the Poseidon Principles. It’s worth noting though that the Poseidon Principles ask the shipping sector to align with the IMO target, which is not aligned with the 1.5C goal. Finally, in terms of remuneration, most banks have integrated climate metrics as a measurement tool to incentivize boards to reduce the operational emissions of their banks, although it was found that some of the metrics employed do not focus on material issues. Other metrics which have been identified as commonly used amongst banks are targets focusing on the banks’ Scope 1 and 2 emissions or to source 100% renewable electricity, sustainable finance targets in either short-term or long-term plans, and the measurements of banks’ reputation and performance relative to peers.

[1] This number has risen to 24 since the publication of the report.

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