When the Bank of England postponed the Biennial Exploratory Scenario (BES) on climate-related risks earlier this month, my immediate fear was that the financial services industry would use this as a catalyst to ‘postpone’ their response to climate change. The good news is that this does not seem to be the case.
In the week following the announcement we have met with senior leadership across 14 of the 50 largest global banks, including five that are in scope for the Bank of England BES exercise. The overriding message from all of them is that Climate Change is a greater focus for them than ever. At the same time, Baringa’s energy practice is seeing strong demand from capital providers of all sorts, from private equity to pension funds, continuing to pursue investments in the energy transition.
Why is this? The reality is that everyone now understands that the stars are aligned between the impacts of climate change across commercial risks and returns, potential new products and propositions, social responsibility and reputational risk, and ultimately the impact these will have on share price, capital and funding in or outflows.
Many financial services organisations have issued statements of commitment on climate change, but most lack the specificity or understanding on how they will achieve their goals. We believe that banks must prioritise a data and insight-driven approach to climate change, that measures climate risk and temperature alignment in an integrated method, and that brings together strategy, risk, and sustainability.
We are now seeing the industry adopting this data and insight-driven approach, which is now moving ahead at pace. The silver lining of the postponement of the BES is that the largest UK-headquartered banks are now taking a strategic, data-driven and integrated approach that will meet all the broad requirements of both internal and external stakeholders. And with the ECB recently publishing their draft standards for climate risk management, which they plan to bring into force from the end of 2020 across Europe, large European banks are also accelerating the development of their climate change capabilities.
We are confident that in 2021 we will see a step change in the quality of reporting of both climate risk as well as contribution to decarbonisation (and global warming) through enhanced TCFD and other reporting. We also expect to see greater focus on climate change in driving investment and lending decisions, and a range of commercially successful climate change-related products and propositions being launched.
Combined, these efforts will start to drive the reallocation of capital that the world so desperately needs – towards companies and assets that are going to drive transition and decarbonisation, mitigate climate risk, and deliver commercial returns. This can also help give us the blueprint for the injections of capital needed to reboot the economy post Covid-19, delivering long term sustainable growth.
Colin Preston is the Global Head of Financial Services and Climate Change at Baringa Partners. Baringa is a leading global advisory firm and award winner of the Climate Risk Innovation Award 2020 from Energy Risk for its Climate Scenario Model, which is being used by many global leading financial services institutions.