My grandparents used to tell me of times when they entered their house through the roof as the entrance door couldn`t be opened due to the huge amounts of snow that accumulated overnight. \u00a0It is not the case anymore as each decade since 1850 has been successively warmer than any preceding 10 year period. There is irrefutable evidence that we, humans, in our pursuit to maximize individual profits have forgotten about the externality costs produced \u2013 in particular global warming, – a cost that ultimately will have to be borne by us [1].<\/p>\n
There are few industries as susceptible to climate change as the Banking industry is as a category that plays an integral role in funding all sectors of the economy. At the same time, this industry has the incredible capacity to leverage its scale and resources to help us transition from a high carbon to a low carbon economy. The International Energy Agency estimates that in order to meet the recent COP21 agreement pledges to cut carbon emissions and limit temperature increase to 1.5\u00b0C , the world economy would need to invest about $6 trillion \/ year over the next 15 years [2] \u2013 [3]. Although an impressive amount, it pales compared to the $65 trillion in assets the top 50 banks manage [4].<\/p>\n
Bank of America (\u201cBoA<\/strong>\u201d) is one of the above 50 banks and over the past few years has embarked on a constructive path towards fighting climate change. The challenges BoA faces and the way these are addressed can be looked at from two major perspectives: risks and opportunities.<\/p>\n Risks.<\/u> Climate change poses physical, regulatory, systemic and reputational risks over a significant part of BoA`s balance sheet, with the most affected portfolios in the agriculture, beverage, energy and infrastructure businesses. As global warming makes it more difficult to grow crops, raise animals, and catch fish, the companies BoA finances in this sector will show increased probabilities of default. The increased scarcity of water negatively impacts the credit worthiness of companies in the beverage industry. The higher likelihood of extreme weather events, such as hurricanes, affects the infrastructure and real estate portfolios [5]. Global consensus on climate change has led to the development of various policies meant to tackle this problem. The ratification of the COP21 agreement by the US will eventually result in regulations requiring inefficient coal powered plants to be phased-out by a specific date. According to the International Energy Agency, should the greenhouse emission goals be met, only one third of the established fossil fuel reserves would be used. All of the above cases will result in losses for the bank as assets will be either be stranded or companies will default.<\/p>\n Although part of the regulatory and reputational risk is mitigated through BoA`s coal, paper and forest policies which restrict the types of assets that the bank can finance or advise on, I believe much more needs to be done on this matter [6]. From a governance level, BoA should incorporate climate change in its rating and loss given default models, stress testing at overall bank level instead of individual projects, repricing of the loans and service, its risk management committee deliberations, and alignment of bankers` compensation with long term risks.<\/p>\n Business and Social Opportunities<\/span>. C<\/em>limate change is offering great business opportunities. In this respect BoA has done a great job by pledging to increase the company\u2019s environmental business initiative from $50 billion (announced in 2013) to $125B in low-carbon and other sustainable business by 2025. To date the bank has delivered $53B since 2007 with $14.5B in 2015 alone [7]. In 2015, BoA was the biggest green bond underwriter in 2015 ($4.57B) in a $41B market with proceeds used to finance investments in climate change abatement or adaption projects. In 2016, BoA announced the expansion of the Catalytic Finance Initiative, growing it to a $10 billion commitment toward high-impact sustainable investments [8]-[9]. Over the past years, BoA has also gradually built its renewable portfolio, now several times that of its coal mining one. I find the bank has done great work in terms of economic and social opportunities, the latter exemplified by the co-signing of the White House American Business Act on Climate pledge.<\/p>\n Banks play an integral role in financing the economy and thus society has a large stake in the industry\u2019s successful adaptation to climate change. This presents both an immense opportunity and a huge responsibility for the banking sector to get actively involved in combating climate change and to gain back the trust of society.<\/p>\n I hope that banks will help ensure my stories about snow I tell to my grandchildren will be the same as those they tell their grandkids. [781 words]<\/p>\n <\/p>\n [1] NASA \u2013 Global Climate Change (www.climate.nasa.gov\/effects<\/a>)<\/p>\n [2] Boston Common Asset Management \u2013 Are Banks Prepared for Climate Change<\/em>, 2015<\/p>\n [3] International Energy Agency – World Energy Outlook<\/em>, 2015<\/p>\n [4] CDP – Tracking progress on corporate climate progress<\/em>, 2016<\/p>\n [5] \u2013 Global Finance Magazine – https:\/\/www.gfmag.com\/magazine\/november-2015\/biggest-global-banks-2015<\/a><\/p>\n