Responsible Investor

Sub-prime and carbon: an eerie similarity

Supporting renewable energy is a first step, but banks must also come clean about fossil fuel financing.

Amidst the enormity of the current sub-prime lending crisis, it’s easy to see how an issue like climate change might not command much attention from the investment community. Yet climate change and sub-prime lending bear some eerie similarities—namely that banks may be failing to account for underlying risks to a huge class of assets, with tremendous repercussions for the global economy going forward.
While the banking sector itself is not a big emitter of greenhouse gases that contribute to global warming, it is the primary financier of industries that are the major emitters. As regulatory controls and market prices are put on these emissions, this will have a tremendous influence on how banks price securities, assess credit risks and make future investment and lending decisions. At the same time, banks face new opportunities to engage in carbon trading, develop new climate-focused products and services, and invest in the emerging clean technology sector.
Clearly, the time for the banking sector to prepare for these emerging risks and opportunities is now. News out of Greenland and Antarctica is that their glaciers are melting surprisingly fast and could start to swamp our coastal cities, where half the world’s population lives, as

sea level rises. Owners of long-lived coastal assets—and those who finance them—should take heed, as the value of this property far exceeds the amount exposed to the sub-prime lending crisis.
Of more immediate concern is that the United States is now poised to follow Europe—albeit belatedly—in controlling its carbon emissions. The U.S. Congress has introduced no less than seven congressional bills in the past year to place a cap on GHG emissions. And all three leading candidates in this year’s presidential election—Senators Clinton, McCain and Obama—have made it clear that the issue would be high on their agenda after entering the White House in January 2009.
In January of this year, RiskMetrics Group released a study of how 40 of the world’s largest banks are responding to climate change in terms of their corporate governance and management strategies. For this report, we used a “Climate Change Governance Index”—a benchmarking tool developed in conjunction with the Ceres coalition and the Investor Network on Climate Risk (INCR), an institutional investor group with $4 trillion in assets under management. (Ceres and INCR commissioned this report.)
The index is comprised of 14 key indicators, and many

Not a member? Register here »