Risky Business
Banks can’t afford not to factor climate change into the value of their investments, says Entec. Trevor Lawson reports on an industry that’s slowly waking up to a shake up.
Private equity investors are in the news. They’ve taken over Birds Eye and the AA and have recently had their eye on Boots and Sainsbury’s. Their tendency to improve performance by cutting jobs may make them unpopular with trade unions, but one recent takeover has delighted environmentalists. The biggest ever private equity buyout, it has huge sustainability implications for the banking industry, say consultants at Entec.
It happened in February, when theTexas energy supplier TXU was bought for £22.9 billion. TXU had planned to build 11 new coal-fired power stations, pumping out another 78 million tonnes of carbon dioxide each year and more than doubling what the company already releases. Yet the new investors decided to withdraw applications for eight of those power stations and put new emphasis on helping customers reduce their energy consumption.
“We’re witnessing the beginning of the end of investments in old-fashioned coal plants,” said David Hawkins, who heads the Natural Resources Defense Council’s Climate Center. “These are very big investors coming to the energy table with very big ideas about where the competitive market is heading. Strategies to fight global warming and save energy are crucial for anyone hoping to succeed in today’s electricity industry.”
Sadly, the banks from whom these private equity investors borrow to increase their purchasing power aren’t necessarily as forward thinking. A new report from Entec and Henderson Global Investors reveals that the UK banking sector has barely started to count the carbon cost of its loans and investments. “Banks are getting better at disclosing the carbon costs of their internal operations, such as electricity use in buildings and the carbon costs of staff transport. But their biggest impact on climate is made through their investments,” explains report author and Entec senior consultant, Sarah Pratt.
The report shows that banks can’t decide on whether to focus their energies on measuring the carbon costs of their investments or on steering their investment portfolios away from carbon-intensive sectors. “They need to do both,”says Pratt. “As regulatory and policy measures start to take their toll on carbon intensive investments, the banks’ exposure to risk increases. For example, the TXU bid showed that having US federal regulation of carbon on the horizon is already influencing corporate mergers and acquisitions.”
“Over half the banks analysed in 2006 have commercial loan portfolios in ‘high risk’sectors with exposure to the regulatory and weather risks of climate change,” she says. The potential carbon exposure of UK listed banks has been estimated at £5.7 billion and some of them have started to wake up to the risks. “We have made a start, a good start,” insists HSBC chairman Sir John Bond. Though he admits: “I know how far we have to go in the coming years to play our part in slowing global warming. We have plenty of learning to do and we believe that financial institutions will play an important role in the shift to cleaner energy. ”
Some banks have already started. At its AGM in May, Lloyds TSB announced that the banking group will have reduced or offset carbon emissions by 30% by the end of 2012.
But there’s still a lot of work to be done. “I hope that this report will lead to more debate in the sector about these issues and a consensus on the action that’s needed to address them,” says Pratt.“ Climate change is not something banks can afford to ignore when valuing their investment portfolio.”
Trevor Lawson is a writer and consultant on environmental issues.
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