Through their lending, investment, and other financial services, commercial banks1 play an indispensable role in mobilizing and allocating financial resources for the private sector. As such, they are in a unique position to either help further entrench patterns of energy production and intensive energy use that are based on the burning of fossil fuels, or to catalyze the necessary transition to an economy that minimizes GHG pollution and relies on energy efficiency and low/no carbon energy sources. BankTrack believes that with this influential position comes a special responsibility for banks to play a leadership role in addressing the challenges of climate change.
To some degree, banks may place climate change within the logic of the “business case” for sustainability. After all, there are substantial opportunities to profit from investments in renewable energy, energy efficiency and the adaptation to a changing climate.2 Most banks will also add the business opportunities provided by carbon trading to this list. Focusing on climate change is thus presented as a winning business strategy.
But relying on market mechanisms and traditional business models alone will not deliver to the task at hand. The climate crisis has been described as the “greatest and widest-ranging market failure ever seen”.3 As a result, there remain enormous opportunities for banks – and business in general – to maximize short-term profits and shareholder value by supporting greenhouse gas-intensive investments – such as fossil fuel extraction – even where this leads to staggering social and environmental costs.
A bank wishing to disentangle itself from clients and activities with a negative impact on climate change must be willing to forego such short term business opportunities, in favour of long term gains.4 BankTrack also believes that banks’ current emphasis on carbon trading as a solution to the climate crisis is fundamentally misdirected. There is growing evidence that carbon markets do little to contribute to real emission reduction, while delaying the necessary structural shift from carbon to no/low carbon energy economy. In addition, they often finance projects with adverse impacts on marginalized communities in the Global South.5
Governments responded to the financial crisis at the end of 2008 by providing enormous sums of public money to a great number of private banks. Many of these banks are now owned in part by the taxpayers. The public stake in these banks creates an added responsibility, and in some cases, possibly even a legal duty, to ensure that they are operating in the public interest, or at least as ‘best practice’ institutions in the sector.6
BankTrack calls upon all international commercial banks to develop, in consultation with civil society stakeholders, a sufficiently ambitious, publicly-available climate policy that addresses how the bank will reduce the climate impacts of its lending and investments and determines how it will help finance the transition to a low-carbon economy.
First, banks should take steps to disengage from all activities and projects that substantially contribute to climate change. They should:
- End support for all new coal, oil and gas extraction and delivery;
- End support for all new coal-fired power plants; and
- End support for the most harmful and least efficient practices in other GHG- intensive sectors, such as agriculture, forestry and transportation;
Second, banks should minimize the extent to which their remaining activities and investments contribute to climate change. Towards this end, they should:
- Assess and report on GHG pollution associated with all their loans, investments, and other financial services;
- Establish sufficiently ambitious portfolio and business-unit emissions reduction targets in line with current science on climate stabilization; and
- Develop a set of tools to address climate issues and reduce GHG pollution across the full range of their operations and services.
Third, banks should increase their support for the development and use of climate-friendly technologies and production processes. Accordingly, they should:
- Increase support for GHG pollution reduction technology, renewable energy production and energy efficiency in all business lines; and
- Develop products and services to help retail customers address climate change.
Fourth, banks should not engage in so called ‘false solutions’ to climate change, such as carbon trading and the financing of nuclear energy, large scale hydro power, biofuel production with a negative socio-environmental impact, natural gas exploration and carbon capture and storage.
1 While action is required from all financial institutions, this paper is focused primarily on commercial banks operating at national or international level offering banking services to retail, corporate and government clients.
2 Government of the United Kingdom (2005), Investing in the Future – Background Paper for European Conference on Corporate Social Responsibility and the Financial Sector, London, December.
3 Stern, N. et al., (2007) Stern Review: The Economics of Climate Change.
4 Bill Gates famously referred to this as “creative capitalism”: a new business model in which the public good is linked to the profit motive in ways that help advance both. Gates, B. (2008) “A New Approach to Capitalism, Remarks delivered at the World Economic Forum, Davos, Switzerland, 24 January.
5 See, for example, Gilbertson T. and O. Reyes (2009), Carbon Trading: How it works and why it fails Dag Hammarsjkold Foundation, Upsalla. November, http://www.dhf.uu.se/pdffiler/cc7/cc7_web.pdf
6 See for an example of how this would work for RBS in the United Kingdom PLATFORM (2009) Towards a Royal Bank of Sustainability; protecting taxpayers’ interest; cutting carbon risk, http://www.banktrack.org/download/royal_bank_of_sustainability