As the lynchpin of the global economy, banks have an essential role to play in minimizing the worst impacts of climate change. How banks respond to the climate risk that they individually and collectively face depends heavily on how they measure and analyze their exposure to it.
The climate risk banks face stems from the failure of their clients to adequately prepare for a lower-carbon future. This risk has the potential to significantly damage financial institutions and the broader economy—and impede society’s ability to tackle climate change at the speed and scale required to avoid its worst impacts. This is doubly true because the understanding of tail risks—risks once thought too extreme to consider—has dramatically changed, first with the 2008 financial crisis and now with the COVID-19 pandemic.
Many banks have begun to act. Some lending policies are being adjusted for risky fossil fuel companies. Some banks have called on policymakers to address systemic climate risk. Global players have even made climate commitments that cover their financing activities. But for most banks, the current view of climate risk is incomplete—it focuses narrowly on fossil fuel sectors or broadly on the need for policy action. It is what lies in the middle—the massive amount of financing banks provide to sectors, including agriculture, manufacturing, construction and transportation, that rely heavily on oil, gas and coal—that could threaten climate and financial stability if unaddressed.
This report investigates the syndicated loan portfolios of the largest U.S. banks and their exposure to climate transition risk, which arises from the policy, regulatory, consumer preference and reputational impacts of the transition to a lower-carbon economy. It complements other leading-edge approaches and highlights the imperative for banks to use their proprietary data to fully test its findings.