First-Ever Survey Shows Emerging Market Banks Growing Interest in Climate Change
Two-Thirds of Banks Acknowledge Business Risks from Climate Change
Amid growing pressure on developing countries to join an international climate treaty later this year,released today shows that emerging market banks are beginning to integrate climate change considerations into lending and other business decision-making, but that significantly more attention is needed.
The report, commissioned by the German development finance institution DEG — Deutsche Investitions- und Entwicklungsgesellschaft mbh—found strong evidence that most Asian, Latin American and other emerging market banks are aware of the wide-ranging business impacts from climate change, such as the growing physical risks from increased drought and flooding and the growing investment opportunities associated with renewable energy, energy efficiency and climate adaptation projects. Despite these trends, the report shows that only a small number of banks are financing clean energy programs and fewer still are participating in carbon trading projects.
“More emerging market banks realize that climate change is a big business issue, but their responses so far are inconsistent and only scratch the surface of what is needed,” said Mindy S. Lubber, president of Ceres, which published the report, Addressing Climate Risk: Financial Institutions in Emerging Markets. “As key providers of capital in these developing countries, these banks must do more to steer their economies to safer, clean energy solutions and away from risky carbon-intensive investments that exacerbate climate change.”
The report, authored by RiskMetrics Group, a leading provider of risk management and corporate governance services to the global financial community, features a survey of financial institutions in emerging markets. RiskMetrics contacted 154 banks, credit institutions and investment funds in Asia, Eastern Europe, Latin America and other regions, of which 64 institutions provided full survey responses.
Banks and other financial institutions are a key player in combating the impacts of climate change and supporting the investments needed to curb greenhouse gas (GHG) emissions, especially in non OECD-developing countries where 90 percent of future GHG growth is expected to take place.
With the global carbon trading market expected to reach USD 3 trillion by 2020 if cap-and-trade carbon-reducing laws are passed in the United States and other markets, emerging market banks have a significant opportunity to broker the deals and promote sustainable development of their economies.
The report found that a growing number of emerging market banks are responding to climate-related risks and opportunities, primarily by implementing climate-specific policies, elevating board of director oversight and boosting investments in clean energy and carbon-trading opportunities. But only a handful are integrating climate risks into their core business of lending by pricing carbon costs into their financing decisions.
Among the report highlights:
- More than four-fifths of survey respondents have established a risk management system that addresses environmental, social or other sustainability issues.
- Nearly two-thirds of respondents acknowledge that climate change will impact their business; 55 percent forecast both positive and negative climate change impacts.
- The majority of respondents – 67 percent – have established an overall environmental or sustainability policy to guide business practices. Almost a third of these have policies that address climate change issues explicitly.
- Twenty-eight percent say the board is directly involved with climate change initiatives.
- Nearly one-third of the respondents, mostly in Eurasia and Latin America, are incorporating climate change considerations in their lending and investment decisions.
The study identifies several leading institutions – such as Rabo Equity Advisors, Grupo Finterra, YES Bank, Center-invest Bank, Axxess Capital, Frontier Markets Fund Managers, Global Environment Fund, and DLJ South American Partners – which are beginning to move beyond general environmental policies to integrate climate change issues into core business practice. These leaders are also seeking opportunities to finance carbon offset projects and invest in burgeoning renewable energy markets.
“There is encouraging progress among emerging market banks to consider the impact of climate change on investments and take advantage of new climate-related opportunities,” said Peter Thimme, Head of Sustainable Development/Environment for DEG. “DEG is pleased to see that our financial sector clients are making climate change a priority, and we plan to continue to support these efforts through targeted financing, technical assistance and training programs.”
“Emerging market banks are beginning to position themselves as local development partners in clean technology financing and carbon markets,” said Doug Cogan, Director of Climate Risk Management at RiskMetrics Group.” “But they will have to step up the pace in order to curb emissions growth and harmful physical impacts posed by climate change in developing countries.”
DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG), a member of KfW Bankengruppe (KfW banking group), finances investments of private companies in developing and transition countries. As one of Europe’s largest development finance institutions, it promotes private business structures to contribute to sustainable economic growth and improved living conditions. For more information, visit www.deginvest.de.
About Ceres and the Investor Network on Climate Risk (INCR)
Ceres is a leading coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as climate change. Ceres direct the Investor Network on Climate Risk (INCR), a network of more than 80 institutional investors with collective assets totaling approximately $9 trillion. For more information, visit www.ceres.org and www.incr.com.
About RiskMetrics Group
RiskMetrics Group is a leading provider of risk management and corporate governance products and services to participants in the global financial markets. By bringing transparency, expertise and access to the financial markets, RiskMetrics Group helps investors better understand and manage the risks associated with their financial holdings. It addresses climate change and other environmental, social and governance (ESG) factors through its Sustainability Solutions Group. Headquartered in New York with 20 global offices, RiskMetrics serves some of the most prestigious institutions and corporations worldwide. For more information, visit www.riskmetrics.com.