Banks perform well on climate risk disclosures

The four large local commercial banks providing asset finance and other financial services to SA companies have all performed well in disclosing their targets to counter climate change and the metrics they use to measure compliance to published guidelines in SA.

This is according to Just Share, which analysed banks’ latest reports by comparing their climate-related disclosures to guidelines set by the Task Force on Climate-related Financial Disclosures (TCFD), a policy task force established by the Financial Stability Board (FSB) in 2015.

The task force was created to recommend how the financial sector can incorporate climate-related issues in its decision-making, basically on all levels within banks and other financial institutions.

Fared well

That banks fared well in terms of onerous climate-risk disclosures is no small achievement.

The World Wide Fund for Nature SA (WWF) reiterated the importance of TCFD in a discussion document.

“A key TCFD objective is to develop recommendations for more effective climate-related disclosures that will assist organisations in their understanding of climate-related risks and to provide guidance on how organisations can implement measures to protect them from such risks.

“The TCFD recommendations are fast becoming global best practice for institutions who are looking to integrate climate-related risks into their governance, strategic and operational processes,” says WWF SA.

“In the context of South African companies and investors, the journey has only just begun.”

Leading lights

Justin Smith, head of business development of WWF SA, wrote in a report discussing the 2021 update of the original TCFD recommendations that these recommendations have been adopted by over 1 500 companies and institutions globally.

“With the backing of Mark Carney and Michael Bloomberg, the TCFD has quickly become widely recognized and the growth in adoption and alignment to the recommendations has been staggering,” says Smith.

Mark Carney is a former governor of two central banks, the Bank of Canada and the Bank of England, and is currently head of impact investing at Brookfield Asset Management.

And Michael Bloomberg – the multi-billionaire (worth $82 billion at the last count and number 10 on the Forbes 400 list of billionaires) owner of the influential news and finance information network Bloomberg, former New York mayor, and US presidential candidate – needs no introduction.

Banks are on board

Another pointer that banks, in particular, are doing very well – not only in terms of reporting, but putting talk into action – was the recent launch of Standard Bank’s new policies on financing companies that are deemed to be harmful to the environment.

Pushed by environmental activists, Standard Bank recently rolled out strict new lending criteria that would choke coal mining companies and coal users (such as Eskom) of capital within a few years.

If followed by other banks and financial institutions, these companies have little chance of survival.

The discussion document leading to the update of the original 2017 TCFD guidelines and publication of the new 2021 guidelines also shows how seriously SA’s financial sector is taking climate change issues. All the banks, insurance companies and retirement funds submitted input by way of the Banking Association of SA (BASA), South African Insurance Association (SAIA) and the Institute of Retirement Funds Africa (IRFA).

However, Just Share notes in its analysis that the latest reports published by Nedbank, Standard Bank, Absa and FirstRand were still measured in terms of the 2017 guidelines as the reports preceded the publication of the newer version of the guidelines.

Responsible investment

Just Share, describing itself as a non-profit shareholder activism organisation, believes that responsible investment is necessary to create a just, inclusive and sustainable economy.

It says the problem is that SA is facing enormous challenges of poverty, inequality and environmental degradation.

“Our relatively small pool of large institutional investors, coupled with some of the most progressive responsible investment legislation and corporate governance initiatives in the world, should mean that investors are using their power to drive good corporate citizenship and hold companies accountable for negative environmental and social impacts.

“But claimed commitments to responsible investment and the integration of environmental, social and governance (ESG) issues into investment decisions, have not had a meaningful impact on how companies behave,” Just Share says in an introduction of the organisation.

It argues that asset owners, and in particular pension funds, must do more to comply with their fiduciary duty to ensure the long term sustainability of their funds’ investments.

The beauty of targets

Just Share seems to have been targeting banks specifically with the recent analysis showing that banks are improving in disclosing how they view climate change risks, how they take climate change risk into consideration when making business decisions, and how they measure progress.

It’s not surprising that the Just Share analysis found that banks performed best in the category entitled Metrics and Targets – bankers just love to work to set and measurable targets.

“Overall, while the assessed banks tick some of the boxes required by the TCFD’s detailed guidance, there are many recommended elements of reporting which none (or, at best, a few) of the banks provide,” says Just Share in its commentary to the analysis.

“All of the banks perform best on the Metrics and Targets section (in terms of attempting to comply with most of the detailed guidance points required under each disclosure), and worst on the Risk Management section.”

Room for improvement …

Risk management, in this regard, refers to describing the organisation’s processes for identifying and assessing climate-related risks including disclosing processes for assessing the potential size and scope of identified climate-related risks.

Another area where banks performed badly in Just Share’s analysis is that banks fail to report how frequent climate change features in discussions in board meetings or in other (important) management meetings. Only FirstRand was found to be trying, with a score of “point partly met”.

Just Share says climate science has demonstrated the critical urgency of significant emission reductions by 2030.

“Decision-useful information that is relevant, consistent and comparable is essential to inform capital allocation that will support climate action and the just transition,” it says.

“This means that banks should endeavour to address all of the detailed guidance points outlined by the TCFD in their next reporting cycle,” it adds, noting that the organisation recognises that all five banks are still in the early stages of TCFD reporting.

Just Share also notes the next analysis of banks’ compliance in reporting on its climate-related issues will be measured against the newly updated 2021 guidelines.