From Laggards To Leaders – The Climate Action We Need From The Big Banks

22 August 2023

Image: Dr. Ken Henry AC, Chair of the Australian Climate and Biodiversity Foundation: https://www.flickr.com/photos/crawfordforum/35475381475/

In a hard-hitting, first-of-its-kind report the Australian Conservation Foundation (ACF) with input from Monash Business School has provided a benchmark of the performance of Australia’s biggest banks in achieving their commitments to reach net zero emissions. The timely report makes for sobering but important reading, particularly for investors concerned about climate change – and that ought to be every investor!

Most New Zealand investors in managed funds, including many in ethical investment funds, are likely to own shares in Australian banks and international banks via these funds. If you want to take further steps to ensure your money matters more in encouraging action on addressing the climate emergency, then this ACF report provides valuable insights for you to raise with your financial adviser and fund managers.

Like Australia, NZ’s banking market is dominated by four major players: ANZ, Westpac, the NAB (National Australia Bank) owned Bank of New Zealand, and CBA (Commonwealth Bank of Australia) owned ASB Bank. These four banks, along with Macquarie, were the focus of the ACF report. In New Zealand the big four - ANZ, Westpac, BNZ and ASB, make up about 85 per cent of the market for mortgage and other lending, and hold 90 per cent of total bank deposits.

Executive Summary extracts

Following are comments from the report’s Executive Summary:

…we are now three years into the critical decade for climate action – the decade in which greenhouse gas emissions must be cut by half to limit global warming to 1.5°C.

…Banks have an essential role to play in that transformation. They have the unique power to direct billions into solutions to the climate crisis – and away from making it worse.

…The past three years have seen an enormous surge in corporate net zero commitments. This has included Australia’s five largest banks joining the Net-Zero Banking Alliance, a global network representing more than 40% of global banking assets.

Despite these public commitments, this report finds that the climate policies of Australia’s biggest banks are failing to deliver. They are not cutting flows of capital to damaging new coal, oil and gas projects. They are not scaling up the climate solutions at the pace we need. And they are lagging far behind comparable jurisdictions such as the United States and the European Union.

This report reveals the gaping holes in the big banks’ climate policies. While most banks now have policies around not providing direct finance to coal, oil and gas projects, their policies still don’t cover the main ways they finance fossil fuel expansion through general use of proceeds finance, bonds and capital markets facilitation.

It confirms a lack of consistency in setting targets and transparency in reporting financed emissions. And it identifies gaps in bank governance, such as: failing to be guided by climate scenario modelling, not incentivizing management to achieve climate goals, and insufficient accountability at a board level on climate outcomes.

The research did find signs of leadership and momentum in the banking sector to reshape society for a clean energy future and a safe climate. By building on this leadership and raising their ambitions in line with climate science, banks can become powerful allies in protecting nature, creating healthy communities and building a prosperous, renewable-powered Australia.

Foreword extracts

In his Foreword to the Report Dr. Ken Henry AC, Chair of the Australian Climate and Biodiversity Foundation and a director of Accounting For Nature, who previously served as the Secretary of the Department of the Treasury and the Chair of NAB says the following:

We have been talking about climate change for decades. 

For business, climate change poses a set of risks and opportunities. 

It would be fair to say that, to date, Australian businesses generally have underinvested in the management of those risks and failed to make the most of the opportunities. This matters to shareholders, creditors, and insurers with financial exposures to those businesses. 

But it matters far more than that. The climate-related decisions being taken by Australian businesses affect the lives of all Australians and, especially because Australia is a global leader in the extraction and commercialisation of fossil fuels, those decisions will affect the lives of every one of the Earth’s inhabitants, both human and non-human, for centuries to come…

…Importantly, Australian banks don’t have to be mere passive actors in this transformation. They are, themselves, major players in the Australian economy, and they know it.  Most business bankers with whom I engaged, when working in the Treasury and subsequently on the NAB Board, were justifiably proud of the contribution they were making, through their lending decisions, to Australia’s economic development. 

Many treasured rich histories of judgement calls that anticipated and accelerated important social and economic turning points in Australia’s economic development; judgement calls based on clear-sighted assessments of risks and opportunities. These are narratives of leadership.

Responding to the threats posed by climate change demands the writing of new leadership narratives.  Of course, government action is essential. But Australia’s political leadership does not have a respectable legacy in dealing with climate change. Leadership has had to come from other quarters; notably many Australian businesses and industry associations have set higher ambitions than government in recent years.

Consumers, investors, insurers, and workers are wanting to know how these commitments are being converted into action. Whilst businesses in all industry sectors are of interest, the transformation of bank balance sheets warrants especially close monitoring.

There’s a lot riding on it.

Scoring

The report scored the banks using the following themes and allocation of points:

Targets (21 points)

Focuses on the targets that the bank has in place to support its net zero commitment. It includes indicators on the bank’s interim financed emissions targets, sector-based financed emissions targets, climate solutions financing target and renewable energy consumption commitment.

Strategy and action (35 points)

Assesses the policies and practices that the bank has in place to support its net zero commitment and its financed emissions reduction targets. It encompasses various indicators that assess the bank’s policies related to the provision of finance for new or expansionary coal, oil or gas operations, as well as the bank’s expectations for emissions-intensive customers to adopt and implement transition plans aligned with a 1.5°C pathway. This theme also evaluates whether the bank has a policy on deforestation.

Governance (28 points)

Covers the governance structures that the bank has in place to inform and execute its net zero commitment. This includes indicators on the adequacy of climate scenario analysis, the accountability, competency and remuneration of board members and the bank’s engagement on climate change-related policy.

Reporting (16 points)

Measures the transparency of the bank’s reporting on climate change-related topics. The indicators assess the disclosure of the bank’s financed emissions and the methodology used to calculate financed emissions. Additionally, indicators assess the disclosure of activities included in its climate solutions target and the third party verification of sustainability performance reporting and financial statements.

Next Steps

Have a look at the report and results here. Ask your financial advisor and fund managers for their thoughts in response to the ACF report and about the action they are taking to encourage climate leadership from the big banks. Stay tuned for more from me on the hot topic of ethical investment and banks.