Major new study from consultancy giant reveals UK banks are more engaged with climate risks than ever before, but decarbonisation plans remain underpowered
UK banks and building societies are on track to comply with new rules requiring them to get a better handle on climate-related risks, but a majority are yet to translate that engagement into meaningful decarbonisation strategies.
That is the conclusion of a major new survey of the finance sector carried out by consultancy giant PwC, which analysed the preparedness of 17 Prudential Regulation Authority (PRA) regulated banks and building societies of varying sizes ahead of the 2021 introduction of the Bank of England's (BoE) new climate risk stress test requirement.
The BoE's Biennial Exploratory Scenario (BES) will see the UK's largest banks, as well as the financial system more broadly, tested against different climate scenarios to understand their likely exposure to both physical climate risks and stranded asset risks arising from the transition to clean technologies.
The survey suggests the sector is well prepared for the new rules, with 94 per cent of those analysed stating they are on track to meet or beat the end of 2021 deadline for embedding climate risk programmes into their operations.
Moreover, 71 per cent of respondents stated that climate risk is already embedded in the firm's long-term corporate strategy, while 70 per cent said they were in the process of defining metrics to quantify their exposure to climate risk.
However, the survey also found that despite a flurry of new decarbonisation goals from the likes of Barclays and NatWest just 29 per cent of respondents have set a science based or net zero climate target.
"Despite the COVID-19 pandemic, firms and regulators are keen that the climate risk agenda continues to progress," said Jon Williams, Partner for sustainability and climate change at PwC UK. "Both the Bank of England and the Prudential Regulation Authority have clearly set out that climate change brings financial risks that need to be managed now.
"However, our survey shows that even though there remains a great willingness to address this issue, more needs to be done to turn this into feasible action. Respondents told us that a lack of data is a key challenge in correctly understanding the possible climate related risks and although it's clear that respondents are looking ahead to develop a strategic approach to climate risk they first need to build the foundations, and time is running out."
He added that there was a clear case for bank and regulators to co-operate to share best practices and accelerate the development of credible climate risk and decarbonisation strategies.
"In recent years, we've seen firms make great strides in identifying and managing climate-related risks but there is still much to be done," he said. "By working together with the regulators and their customers, banks and building societies can continue to make progress in a way that ultimately advances the overall goal of an orderly transition to a net zero future."
The report also revealed that banks and building societies are facing a number of technical challenged as they seek to get a better handle on climate-related risks.
"All respondents indicated that gathering accurate, decision-useful data to inform their risk management activities was a critical challenge, and many have encountered difficulties in selecting and calculating the right metrics to monitor risk," the report stated. "In addition, nearly half of the firms surveyed are yet to translate initial analysis of their exposures into assessment of the risks created by climate change. These challenges have made it difficult to meet requirements in more complex areas of risk management, notably scenario analysis, which only half of the respondents to our survey have managed to undertake."
Significantly, larger banks with major resources to draw upon were facing much the same technical challenges establishing the right metrics and processes to assess climate risks as smaller banks and building societies.
The report came on the same day as the public pressure on banks to decarbonise their portfolios was further underlined by a protest outside the offices of the European Central Bank (ECB) in Frankfurt.
Activists from the Koala Kollektiv, a climate justice group, set fire to a model planet Earth outside the headquarters of the ECB to highlight its continued investment in fossil fuel assets.
The action was timed to coincide with today's 'ECB listens' event, which is intended to gather input from civil society groups to help shape the bank's future direction and priorities as part of an ongoing strategy review that has raised the prospect of it ramping up its response to the climate crisis.
"Stopping climate change is the most urgent challenge of our time," said a spokesperson for the Koala Kollektiv. "If we fail to meet the Paris climate targets, humanitarian crises such as famine and wars over resources will become a constant reality in this century. We demand that the ECB stops giving money to industries that threaten our future. That means: getting out of coal, oil, gas and combustion engines. In particular, the billions spent to respond to the Corona crisis should not add fuel to the climate crisis. Instead, the ECB must promote a socio-ecological transformation of our economy."
It is an argument that is gaining traction in many financial circles, with a host of leading banks signalling over the summer that they intend to achieve net zero status for both their operations and their entire investment portfolios by 2050.
Barclays, NatWest, HSBC, and Morgan Stanley among others have all unveiled various net zero commitments in recent months, and the cohort of top banks with net zero goals in place expanded further this week when South Korea's Shinhan Financial Group reportedly became the first East Asian bank to set such a target.
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