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Insight 03.10.2022

Global banks: the policemen of the energy transition

Global banks: the policemen of the energy transition

The decarbonisation challenge facing the planet is a simple concept; the practical implementation of change is, however, horribly complex.

At the highest level, the countries that signed up to the Paris Agreement have set themselves targets for mitigating greenhouse gas emissions – Nationally Determined Contributions (NDCs). These targets provide the most internationally collaborative and extensive roadmap to limiting global warming we have so far witnessed.

At the micro level, companies are approaching the puzzle of how to lower their carbon footprints often with the carrot of climate subsidies and the stick of carbon taxes. Both the top-down and bottom-up efforts are essential to the decarbonisation challenge, but what is the glue to bind them together? Who are the enablers of this transition?

One group that wields significant influence over the future path of emissions is the financial community, and within it, the global banking system.

2021’s COP 26 in Glasgow drew an important line in the sand with the establishment of the Glasgow Financial Alliance for Net Zero. Among several eye-catching commitments, perhaps the most significant for the planet was a pledge by 450 finance companies, controlling USD 130 trillion in assets, to achieve net zero by 2050. The reason for believing this is a line in the sand recognises that the most powerful delivery system for decarbonisation has potentially been awakened. The providers of finance, dubbed by some as the, “Policemen of the Transition”, are ready for action. Or are they?

Progress among banks has been slow. 2050 is a long way off and some say an irrelevant date for an urgent crisis, and then there is the mind-blowing complexity surrounding how a bank might deliver a reduction in financed emissions. After all, these are not their emissions, they belong to the companies they lend to or arrange financing for. Geopolitics and the energy crisis have muddied the waters and some would argue that banks are not serious about climate change.

Most dark-green sustainable funds avoid large, diversified banks like the plague, as emissions loading, when fully accounted for, is very high. The exposure to “negative” sectors makes them problematic for some portfolio managers. However, UBP’s Positive Impact Team takes a different approach. We see banks as cross-sections of real economies. As they are systemically important, they will have a proportionate exposure to all areas of an economy, whether good or bad.

Our theory of change for the banking sector is simple and powerful: if a bank commits to decarbonising its financing using robust, independently verified plans, it becomes the agent of change and bestows a positive impact on a scale that few other industries can achieve.

Our research so far has identified a handful of leading banks that have committed to such plans. In this podcast we speak to James Close, Head of Climate Change at NatWest, about what it means to commit to net-zero-financed emissions and why every bank should follow their example.  

Rupert Welchman Rupert Welchman
Portfolio Manager Impact Equities

Hedge funds

UBP is one of the longest-standing investors in hedge funds and a leading European player in the sector.

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