Transparent climate-related financial disclosure

I write a lot about purpose-driven banking, and many folks came back to me saying that what I had written sounded a lot like community banking. Community banks stand for something, they have a purpose and much of it is directed towards their members’ interests and the local community.

And yes, I did mean that, but it’s more than this. The principles of purpose that apply to community banks will, over the next few years, equally apply to commercial banks. This is for many reasons, but the strongest is the concern that Gen Y and Gen Z have about the future, and the possibility of not having one. Now humans will always be ingenious enough to work things out, imho, but if the planet’s ecosystem is truly screwed, then that’s a big challenge.

This is why there is so much in the media about climate crisis right now, and the rise of pressure groups like Extinction Rebellion, supported by everyone from age 3 to 83.

You can see the rise of purpose in the biggest banks being forced upon them by regulators. For example, today it is voluntary for banks to sign up for the Task Force on Climate-related Financial Disclosures (TCFD). Tomorrow, it may be compulsory.

What’s the TCFD you ask?

It was created in 2015, and is being championed by folks like Michael Bloomberg and Mark Carney. The reason is that they see that the climate crisis could pose a greater risk to the financial system than Brexit, Donald Trump and Kim Jung-on combined.

At the end of 2018, the Bank of England published a report on the issue, and found that seven in ten banks are concerned about the issue:

A survey of 90% of the UK banking sector representing over £11trn in assets found that 70% of banks recognise that climate change poses financial risks. These firms have begun considering the most immediate physical risks to their business models – for example the exposure to mortgages on homes that are at risk of flooding, or the exposure of their investment in countries that could be impacted by extreme weather events. And they have started to assess how the transition to a low-carbon economy, driven for example by government policy and technological change, may impact the business models of the companies that banks are exposed to.

In other words, it is a business issue as well as a societal concern.

It’s a shame then that a third of banks are ignoring this issue. This is based upon a report that came out of BCS Consulting last year, which shows:

• Of the 76 banks that endorse the TCFD framework only 39 started disclosing
• Europe is leading TCFD framework implementation, US and Asia-Pacific are significantly lagging behind
• Momentum of new banks endorsing TCFD has slowed significantly since launch in 2017 – only 9 banks have endorsed in 2019 compared to 38 banks in 2017
• The most advanced area of disclosure is banks’ own environmental operational footprint, whereas carbon impact of services banks provide is the least mature

The TCFD framework asks banks to force their corporate clients to disclose activities on their balance sheet that cause potential climate risks and/or where global warming is a risk to their business activities. Bear in mind that California’s largest utility firm PG&E was destroyed by extreme weather at the start of this year, and you can see why this is important.

All in all, you could wrap up my discussion of purpose-driven banking with either a regulatory drive for banking with a conscience or the general view of community-focused banking, but it is neither. What is really is trying to achieve is a way to engage with the workforce and the customers of today and tomorrow. So, stick that in your strategy and see what comes out.