Is Your Bank Ready for Climate Change?
For the last year and a half, it has felt like we've been trapped in a Hollywood horror flick.
Last year it was the Covid-19 pandemic, which seemed to be receding this spring as we rounded the corner toward summer, but now is back with a vengeance as the Delta variant drives up U.S. infection rates, hospitalizations and deaths yet again.
More recently, it was a scientific report published by the Intergovernmental Panel on Climate Change, a United Nations body, that paints a truly frightening picture of our planet’s future. According to the assessment, we (which is to say all of humanity) have waited so long to meaningfully reduce our reliance on fossil fuels that we can no longer prevent many of the damaging and irreversible effects of global warming, including rising sea levels and extreme weather. And we have a very small window of opportunity to avoid its most catastrophic consequences.
As a nation, our views on climate change tend to fall along partisan lines. Climate science is extremely complicated, but it is also very compelling, particularly as it is presented in the IPCC report. Climate scientists almost universally agree that climate change is caused by human activities, according to NASA. It seems foolish to dismiss climate change as a hoax.
What does this have to do with banking? To answer that question, I would start by directing you to the excellent cover story – “Confronting Climate Change” — written by my colleague, Emily McCormick, Bank Director’s vice president of research, in the third quarter issue of Bank Director magazine. In May, President Joe Biden signed an executive order directing the Financial Stability Oversight Council to coordinate the adoption of regulatory measures by the federal banking regulators to address climate change. So, some form of climate regulation is coming for banks, at least while Biden remains in office.
As Emily writes in her story, a small number of banks, mostly global institutions but some smaller ones in the United States as well, have already begun working on their own approach to climate change. I was particularly struck by the strategy adopted by Fifth Third Bancorp, which is broken down into three components. First, the bank wants to reduce its own climate footprint. It also wants to focus on managing the associated risks of climate change, which include physical ones tied to adverse events as well as transition risks, which arise due to the changes that will occur in global and local economies as a result of actions taken to combat climate change. Finally, the bank also recognizes the need to support its clients and communities in the transition to a low carbon economy.
Fifth Third is among a growing number of institutions that have made an individual commitment to be part of the climate change solution, which may eventually require the participation of the entire industry. Transitioning to a low carbon economy may be the most challenging technological and cultural challenge that the United States has ever faced, and banks have an important role to play in that undertaking.