Financial corporations know too little about climate risks

On average for all companies, the greenhouse gas emissions over the entire value chain are 11 times as high as those of their own production. For financial corporations, they are 700 times as high. A study shows what they are doing about it.

In the European Central Bank in Frankfurt, fossil fuels such as coal have long been classified as a financial risk.

Dhe large global financial groups take sustainability seriously. Just last week a number of banks joined the United Nations’ Net Zero Banking Alliance. Many banks, insurers and fund companies have also subscribed to the Principles for Sustainable Investment. But from the point of view of the CDP, a British platform operator for ecological financial data, declarations of intent are not enough. Financial corporations would also have to become significantly better at analyzing their risks through financial involvement in branches of the economy that generate greenhouse gases.

This is confirmed by a CDP study that will be published this Wednesday, which for the first time provides an analysis of the greenhouse gas emissions financed by financial companies on the basis of self-supplied data. It shows that the emissions from the managed portfolios are 700 times as large as the emissions from the company’s own business activities. The average for the industry is 11. This means that if you include all processes in the value chain of a product, the emissions are eleven times as high as the emissions that result exclusively from the manufacture of the end product.

In contrast, this ratio is significantly higher for the 332 financial groups around the world that were examined. There are two reasons for this: on the one hand, the actual business activities of the financial service providers are not very CO2-intensive, on the other hand, the leverage through investments, through lending by banks and risk underwriting by insurers is much greater.

Only a quarter of the responding companies were able to assess their risk

The data service provider sent 738 its questionnaires, 332 financial groups took part. However, even of this group, which was quite turned towards the survey, only a quarter were able to provide information about all risks, including their own financial activities. “You don’t reveal that, that’s a big problem,” said Laurent Babikian, Director Capital Markets of CDP Europe, the FAZ Less than half of the companies reported on how they want to contribute to a world in which global warming is significantly less than 2 degrees increases compared to the pre-industrial age.

With banks it was 45 percent, among asset managers it was 46 percent, among insurers only 27 percent have so far directed their underwriting towards such a goal. 65 percent of the companies examined do not report on the risks that arise, for example, if loans cannot be repaid due to climate risks. “Credit risk is like a bomb,” said Babikian. “Financial institutions need to record these more precisely. The longer you wait, the more expensive it gets. ”The data service provider puts these risks at up to $ 1.05 trillion for the companies examined.

Regardless of the study, CDP currently has a low number of 600 companies around the world that have already geared their business policies to the Paris climate targets. “Companies need to set their goals on a scientific basis in order to set a roadmap for themselves,” said Babikian. Among the 84 organizations that disclosed their portfolio impact as part of the study are the insurers Allianz and Axa as well as the banks BNP Paribas, HSBC Holdings, Legal and General, Raiffeisen Bank International and Société Générale.

Banks and insurers talk to customers about the climate

On the other hand, according to the self-reports, a majority of financial service providers confronted their customers with the climate issue. 82 percent of the banks inform their customers about it, 67 percent of the insurers. These, on the other hand, are a little further in showing customers how they are themselves exposed to climate risks. According to the study, there is great potential in reallocating portfolios on the way to a climate-neutral economy.

“With so much long-term capital still focused on fossil fuels and our time and a carbon budget expiring, the sector needs to act now. Financial corporations that fail to adjust their portfolios are faced with enormous risks, ”the authors write.

However, the survey also shows that the topic is increasingly occupying the boardrooms. In 85 percent of the financial groups, global warming and its consequences for business policy is an issue for the board members. Most of the corporations surveyed reported some top-level oversight on climate-related issues, but for the most part it is focused on their direct operations rather than on financing activities. From Babikiian’s point of view, however, this is where the greatest leverage lies, because the corporations can shift billions. “Instead of contributing to our climate crisis, this capital must instead be used as an engine for rapid change,” he said.