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US banking sector faces larger climate risks than disclosed, says study

Report by Ceres finds too narrow focus on direct fossil fuel lending is creating an ‘incomplete’ picture of climate risks

More than half of syndicated lending by the largest US financiers is exposed to climate risk, according to research by influential US non-profit Ceres – suggesting the country’s banking industry is far more exposed to climate risk than previously understood by stakeholders or disclosed by banks.  

Banks’ understanding of their risks is currently “incomplete”, the study claims, because the focus has been on direct lending to the fossil fuel and energy sectors, while in reality, much of the climate risk is embedded in broader lending, it concludes. 

Financing a Net-Zero Economy: Measuring and Addressing Climate Risk for Banks warns that the climate exposure of loans to sectors heavily reliant on oil & gas – such as agriculture, manufacturing, construction and transportation – “could threaten climate and financial stability if unaddressed”.

The financial sector is called out as being “particularly exposed” because of its “interconnected nature” and its relationship with many other industries.

Dan Saccardi, Senior Director at Ceres, told RI that “given each of these banks has their own direct exposure, if they are also investing in and lending to each other, there is also an indirect exposure compounding things in ways we think could be very substantial”. 

The report focuses on syndicated loans due to availability of public data, but the authors claim that the conclusions apply to broader lending. The research is also limited to climate transition risks – not physical risk.  

The technical analysis in the report was developed by CLIMAFIN, a consulting firm founded by leading European academics. It’s methodology has been used by European regulators including the European Central Bank and the European Insurance and Occupational Pensions Authority.

The study says it is “imperative” that banks disclose the climate risks latent in their full loan books, and makes thirteen recommendations on how financiers can act now to begin to assess and mitigate their exposure, including: 

• Improving their existing climate risk analysis tools and methods, 

• Requiring bank clients to provide more data in key climate-related areas, 

• Developing risk management techniques like stress testing and scenario analysis, and 

• Building climate risk into day-to-day decision-making tools such as client earnings models

Banks are also called upon by Ceres to set and disclose financing targets that are aligned with the Paris Agreement. Earlier this month, HSBC made a Net Zero pledge, but new analysis by NGO ShareAction has revealed that in the four months leading up to the announcement, the bank financed at least four fossil fuel companies “actively involved” in the construction of new infrastructure that is likely to undermine international climate goals. 

One of those deals reportedly saw HSBC take part in a $498m bond issuance to Asian firm KEPCO, whose business is 40% based on coal. 

ShareAction said the deals cast “serious doubt over the credibility of HSBC’s climate commitments, given that phasing out financing of fossil fuels is an absolute must for any net-zero strategy”.