HOW should sustainable investors think about banks that fund emissions-intensive businesses?
At first glance it seems like a red flag.
The finance sector has come under pressure in recent years to stop funding carbon-intensive companies.
Protest votes and activists now regularly disrupt annual meetings.
But increasingly, ESG-driven investors are understanding the sector’s role in funding transition.
Alison Ewings, who heads up engagement at responsible investing leader Regnan, believes banks and insurers play an important role in the economy’s transition to net zero.
Rather than withdrawing support for emissions-intensive sectors, an alternate approach is to engage and seek to directly finance change, says Ewings.
“Ultimately we need actions that will lead to emissions reductions in the real economy. Financial institutions have a very important role to play in achieving this.”
“Changes in credit policy or loan covenants can have huge influence on the way the climate transition unfolds — and the types of activities that get funded.”
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Ewings believes the financial sector needs to shift its focus from reporting on dollar exposure to emissions exposure, taking into account the underlying quality of assets and their ability to make the transition to net zero.
“Banks are disclosing the dollar value of their exposure to different sectors, highlighting in most cases that lending exposure to fossil fuels is actually relatively small — particularly in the Australian context where there’s a lot of mortgage lending.
“But in some ways, that’s the wrong question. It’s the emissions profile of the exposure, not the dollar exposure, that matters.
“What are they doing in their credit policies to have a meaningful impact on client transitions? What are they doing to finance those transition activities?
Lenders can take an active role by making finance contingent on clear expectations for progress on transition.
“This is what’s important.
“Potentially banks can even increase their dollar exposure to these sectors, provided they are able to demonstrate their involvement is leading to to the transition of these businesses and to emissions reduction in the real economy.”
“We are starting to see enhanced disclosures from banks on the emissions trajectory of their lending activities, but there is greater scope to more clearly set out the banks’ role in bringing this about.”
This is similar to the question investors face around engagement versus divestment. Actively deploying capital to support the transition can be a powerful force for change, Ewings says.
And importantly, failing to support those sectors able to transition can have the effect of simply forcing companies to seek alternative forms of capital without doing anything to reduce their actual emissions.
Public policy is another lever the sector can use to seek regulatory conditions supportive of transition.
Insurers can also play an important role.
Ewings points out that some of the newer technologies needed to get the global economy to net zero emissions can be by their nature higher risk.
“The ability to have an insurer underwrite a project can give a bank confidence to finance it.
“The focus needs to be on supporting transition in those sectors where activities can result in real emissions reduction.”
Regnan has engaged with banks and insurers, seeking detail on the nature of their emissions exposure and how they are developing risk management and product solutions that support transition.
Investors need emissions reduction in the real economy in order to manage climate risks within their portfolio, Ewings says.
“The role of the banking and insurance sectors in supporting these reductions is important.”
Alison is Head of Engagement at responsible investing leader Regnan. Regnan is a Pendal Group business.
Alison manages Regnan’s program of engagement with ASX-listed companies, which aims to help improve business performance by addressing issues such as climate change, modern slavery and Indigenous relations.
Alison has worked in sustainability for more than a decade and was formerly the Head of Sustainability at Westpac.
Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.
The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.
The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change. Both funds are distributed by Pendal in Australia.
Find out about Regnan Global Equity Impact Solutions Fund
Find out about Regnan Credit Impact Trust
For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at email@example.com.
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