Banks are beefing up ESG transition teams with high-level executives to help tackle the trillions of dollars of exposure to fossil fuel sectors that financial institutions have racked up.
The global transition to lower emissions is a huge challenge for capital markets. A Global Financial Markets Association report recently estimated that more than US$150trn of financing could be needed in the next three decades to deliver on climate goals set out in the 2015 Paris Agreement. And Moody’s estimates that G20 financial institutions have nearly US$22trn of exposure to carbon-intensive sectors that needs to be dealt with.
“Decarbonisation is an unprecedented challenge for banks that will compound other transformative forces such as digitalisation and cyber risk,” said Alka Anbarasu, senior vice president at Moody’s. “Climate change mitigation and adaptation will require a major reallocation of investments and fundamentally alter decisions regarding the cost and benefit of lending to, and investing in, carbon-intensive sectors.”
'Not philanthropy'
Aware of the scope of the problem, banks have been recasting their organisational structures to have more senior executives and bankers focus on the multi-trillion-dollar challenge. In effect, considerations like climate change and social justice that a few years ago would have been the chief domain of a bank's philanthropy divisions have become a central concern of dealmakers.
In September, Bank of America announced a broad leadership shakeup. Among the moves, Alastair Borthwick will replace Paul Donofrio as chief financial officer in the fourth quarter, with Donofrio moving to manage sustainable finance and chair the bank's sustainable markets committee.
“This was an opportunity to put someone of that stature overseeing sustainable finance,” Andrew Plepler, global head of ESG at BofA, said last week at a Fitch virtual panel on banking. “You need to have somebody of this stature who’s been CFO to understand that it’s not philanthropy – it’s sustainable investment. How do we use our balance sheet to really drive change?”
Transitioning
Other banks have been creating new teams and fine-tuning existing groups tasked with addressing – and taking advantage of – the transition away from high emissions.
Earlier this year, Citigroup created a natural resources and clean energy transitions group with Steve Trauber and Sandip Sen as co-heads, and last week appointed Marie-Christine Olive and Philip ten Bosch as group co-heads for Europe, the Middle East and Africa.
The group complements other new Citigroup divisions, including a new sustainability and corporate transitions group and a sustainable debt capital markets team.
Deutsche Bank recently established an energy transition group within origination and advisory. It will work closely with the natural resource group and sustainability council, the main advisory body to the management board on sustainability topics.
BNP Paribas named a new chief sustainability officer in its global markets business last week as well as a new head of sustainable finance client engagement (see People & Markets section), while UBS named the head of a new ESG advisory team within global banking that will support clients' sustainability strategies and work with M&A and capital markets teams.
“We expect banks to gradually improve their understanding, management and pricing of climate risk, leveraging their core competence as risk-taking institutions,” said Anbarasu. “The transformation to a low-carbon economy is creating vast financing opportunities, too: bank lending, together with green capital market funding, will help banks’ customers transition to low-carbon business models that require large investment.”
'Greenest of green'
The Moody’s US$22trn figure comprises on-balance-sheet bank loans (60%), asset manager equity holdings (30%) and rated insurers’ invested assets (10%), according to a recent report from the ratings agency. The figure represents 20% of total portfolios, with exposure centred on sectors including manufacturing, power and utilities, transportation, and oil and gas. Asia takes up US$9trn, the Americas US$8trn and EMEA US$5trn.
The sheer size of the exposure, in addition to the estimated US$150trn-plus of capital needed to finance the goal of reaching net-zero emissions by 2050, has forced market participants to recalibrate their approach to climate change mitigation. What for many started out as a strategy of divestment – sell whatever isn’t green – has become one of engagement.
“What that tells you is that as a financial institution this cannot be just about investing in the greenest of green companies,” Kara Mangone, global head of climate strategy at Goldman Sachs, said at Fitch’s conference. “This needs to be [about] working with clients, being front and centre with them as they engage in different stages of their transition journey.”