Q&A: how we’ve engaged with European banks over climate change
Q&A: how we’ve engaged with European banks over climate change
The carbon footprint of a bank is relatively small in terms of operating its offices and branches. But as providers of finance, banks make a critical difference to the emissions of their clients, and the planet as a whole. Financed emissions are therefore the key metric to look at for banks.
If the world is to reach the Paris Agreement target of limiting temperature rises to 1.5 degrees above pre-industrial levels, banks will have to phase out the financing of activities that cause harmful emissions.
Justin Bisseker, banks analyst in the European equities team, spent more than a month in 2022 engaging with nine European banks over climate issues. In this Q&A, he explains what this entailed. Carol Storey, climate engagement lead, discusses how these engagements fit into Schroders’ broader climate engagement framework. And portfolio manager Nicholette MacDonald-Brown explains how this engagement helps her pick stocks.
What was the scope of this engagement?
Justin Bisseker (JB): “I engaged with nine European banks where Schroders has a large equity position. My colleagues in the credit team took the lead on engaging with a further three European banks where Schroders currently has sizeable fixed income holdings.
“The purpose of the engagement was to understand how each bank stacks up against 33 different criteria. Within this, the most important areas of focus were: financed emissions; the setting of credible targets and time frames for climate transition plans; and disclosure of both financed emissions and plans for transition.
“All nine of the banks I engaged with are signatories of the UN’s Net Zero Banking Alliance. This requires banks to align their lending and investment portfolios with pathways to net zero emissions by 2050. As part of this, the banks must set 2030 targets that focus on lending or investing in sectors that are the most greenhouse gas intensive. I wanted to find out what targets have been set already, and what we might expect to see over the coming months.”
What were some of the main challenges of the engagement?
JB: “The main challenge was that this is a very nascent area for banks. In several cases, this was the first time a fundamental equity analyst like me had asked them questions about their financed emissions or climate transition plans. It’s a learning curve for many banks in realising that investors are becoming interested not just in profits, but in how those profits are made.
“A key challenge when it comes to measuring financed emissions is that not all banks use the same methodology to do so. Many, but not all, use PCAF (the Partnership for Carbon Accounting Financials). Then, when it comes to targets for reducing emissions, a number of banks have not yet had these validated by an independent body, like the Science-Based Targets initiative. Without this, it’s impossible to gauge if the targets banks have set will actually result in a pathway to net zero emissions by 2050 or not.
“And probably the most frustrating challenge was simply sourcing all the information needed to carry out a proper analysis of each bank, and compare them to each other. As a banks’ analyst, I’m used to finding all relevant financial information in one place, but for most banks there is currently no ‘single source of truth’ for their climate risks and transition plans. So, for example, sometimes it wasn’t clear whether a bank didn’t have a policy, or they just hadn’t disclosed that policy.”
What conclusions could you draw from the engagements?
JB: “Engagements like this are not a one-off process. Part of the purpose is to follow up with each bank on the actions we’d like them to take, and then to check in regularly to see what progress is being made.
“What’s very clear is that the goal posts are moving quickly. Targets or disclosures that seem reasonable one year may soon become out of date as the energy transition becomes increasingly urgent. But we do now know what ‘good’ looks like and are following up to ensure the banks we engage with are held to this standard.
“Despite the challenges I mentioned, European banks are genuinely in the vanguard here and that’s very encouraging. Some of the UK banks in particular are leading the way. What’s also encouraging is that the banks were keen to engage with us on this issue. Many are very interested in our view as to how they stand versus peers.”
How do these engagements fit into Schroders’ broader active ownership activity?
Carol Storey (CS): “We published an Engagement Blueprint in early 2022 which set out our vision for active ownership. Climate is one of our six priority engagement themes and within that, climate finance is one of our top engagement topics.
“The purpose of engaging on this topic is to find out how a financial institution will align its loans or investments toward technologies that will grow quickly in a transition toward net zero emissions and which will require increased financial support. And at the same time, we want to know how it will move away from high emission activities that will face the greatest headwinds in future.
“Justin’s engagements with pan-European banks have been very detailed. I will be asking similar questions of US banks in a forthcoming round of engagements.
“These engagements help us identify the banks who are leaders on climate issues. But we’ve also identified hurdles around data collection, lack of internal resources available to support this issue, and concerns around the lack of an established portfolio measurement and target-setting methodology. In these cases, our engagement has helped us point banks towards good practice we have seen elsewhere.
“This kind of engagement is about working with banks to share knowledge, so that they can make better informed decisions.”
And how does this help with stock selection in portfolios?
Nicholette MacDonald-Brown: “As a portfolio manager specialising in sustainable European equities, I’m looking to invest in a way that delivers attractive returns for clients, and also has a positive impact on society and corporate behaviour.
“Banks’ policies and decisions around financed emissions matter because they affect the value of investments, as well as the wellbeing of the planet. Banks that are highly exposed to the fossil fuel industry face significant financial, regulatory and reputational risks as a result of the transition to a low-carbon economy.
“The kind of engagement Justin has carried out helps me to see which banks face the greatest downside risks, because they will have to give up many of their current financing activities. At the same time, it also helps uncover where individual banks might grow.
“And it’s also about working with banks to share knowledge, so that they can make better informed decisions. In turn, those informed decisions help strengthen our clients’ investments and contribute to building more sustainable business models and a more sustainable world”.
- A snapshot of the global economy in March 2023
- Attractive opportunities in the “middle ground” of credit
- True engagement will move the dial on climate targets
- Value’s resurgence: flash in the pan or here to stay?
- Contagion or contained: banks in focus
- Watch: Is the Asian credit market a bright spot for investors?
The contents of this document may not be reproduced or distributed in any manner without prior permission.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.