|22 January, 2020

Banks feel the heat of global warming in Davos

For the executives, financiers, policymakers and other hangers-on who flocked to Davos this year, environmental concerns are the main subject of conversation

General view of the Davos Congress Centre, where the 50th World Economic Forum (WEF) annual meeting takes place, in Davos, Switzerland January 22, 2020.

General view of the Davos Congress Centre, where the 50th World Economic Forum (WEF) annual meeting takes place, in Davos, Switzerland January 22, 2020.

Reuters/Denis Balibouse

DAVOS, Switzerland - Banks are feeling the heat of global warming in Davos. Climate change is the dominant topic at this year’s elite gathering in the Swiss mountain resort, and financial institutions are firmly in the spotlight. Fund management giant BlackRock’s pledge to vote against directors of companies that aren’t taking enough action may force some to make changes. But demands by regulators that banks manage the risks of a warmer planet will have more bite.

For the executives, financiers, policymakers and other hangers-on who flocked to Davos this year, environmental concerns are the main subject of conversation. Even before the conflab started, the World Economic Forum’s members flagged issues like extreme weather, loss of biodiversity, and failure to tackle climate change as the biggest risks facing the planet, relegating more immediate threats like infectious diseases and war in the Middle East.

On Tuesday, teenage activist Greta Thunberg castigated delegates for their lack of action, while even U.S. President Donald Trump, a vocal fossil fuel enthusiast, pledged America’s support for an initiative to plant 1 trillion new trees.

Asset managers are also turning up the temperature. BlackRock boss Larry Fink’s annual letter to chief executives, published last week, put listed companies on notice that the giant asset manager might vote against directors who it feels have made insufficient progress in tackling climate risks.

Arguably a bigger question, however, is how banks factor the threat to the planet into their credit decisions. Most big companies have relatively little need for equity capital, but still have to refinance their borrowings on a regular basis. Lenders like Standard Chartered have already stopped extending credit to new coal projects. But many bank executives still publicly take the view it’s not up to them to be the agents of change. “I certainly don’t want the banking industry used as the sharp end of the spear, forcing behaviours,” Mike Corbat, chief executive of Citigroup, said in a video interview with Breakingviews on Tuesday.

That stance is becoming harder to defend, though. Regulators are increasingly demanding that banks treat the threat posed by climate change for what it is: a large and hard-to-quantify financial risk. The Bank of England is planning to stress test banks and insurers to quantify the hit to their business from a range of global warming scenarios. A senior executive at one large non-UK lender told Breakingviews that it intended to run similar checks.

Testing financial portfolios for climate risks poses several challenges. For one, it requires institutions to imagine cataclysmic scenarios the modern world has never experienced before. Second, while the physical impact of a warmer planet on people and businesses may manifest itself slowly, financial markets could adjust violently, particularly if governments make sudden shifts in policy.

At separate Breakingviews events this month, activist investor Jeff Ubben and David Blood, co-founder of Generation Investment Management, both predicted that the United States would introduce a tax on carbon much sooner than investors expect.

Yet while individual banks and fund managers can shun problematic investments, carbon-intensive assets won’t just disappear. “The financial system is a mirror of the real economy and will reflect those risks,” Sarah Breeden, executive director at the Bank of England, told a Breakingviews panel last week.

Central banks are also concerned they will end up having to buy assets that nobody else wants to hold, becoming what the Bank for International Settlements this week called “climate rescuers of last resort”.

As they shuttled between meetings with clients this week, senior bank executives expressed several concerns about the new focus on climate risks. One worry is that overly crude metrics of exposure to, say, coal don’t capture the progress companies might be making in transitioning their business away from fossil fuels. Another gripe is that increased scrutiny by banks and asset managers in the west will have little impact on the behaviour of companies in large swathes of the world beyond the reach of international capital markets - particularly China. Finally, financiers are also keen to stress the need to stimulate financing of renewable forms of energy.

Like other topics that have dominated debates at Davos in previous years, the risk is that climate concerns are overtaken by other challenges before companies are pressed into action. The big shift, however, is that banks, insurers and asset managers are increasingly treating global warming as a financial risk that has to be managed. That transition is likely to prove permanent.

CONTEXT NEWS

- Climate change and environmental destruction topped the risks highlighted by world decision makers in a survey ahead of the World Economic Forum in Davos.

- For the first time the WEF’s annual risk report, released on Jan. 15, found the top five concerns were all environmental, from extreme weather to biodiversity loss and events like oil spills and radioactive contamination.

- A new book by the Bank for International Settlements, released on Jan. 20, warned that central banks cannot be expected to save the world from climate change.

- The book, titled “The green swan”, in a play on the idea of unpredictable “black swan” events, warned of the potentially seismic effects of climate change on the world’s financial system.

- “I think we might be on the brink of observing something that might be behind the next systemic financial crisis,” Luiz Awazu Pereira Da Silva, one of the book’s main authors, told reporters.

- However Citigroup Chief Executive Mike Corbat warned against regulators and banks setting standards. “I certainly don’t want Citi and the banking industry used as the sharp end of the spear, forcing behaviours. We want to support anybody that gets stakeholder buy-in for their journeys,” he said in an interview with Breakingviews.

(Editing by Neil Unmack and Karen Kwok. Research by Oliver Taslic.)

© Reuters News 2020

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