With investors throwing their weight behind activist campaigns, banks face mounting pressure to divert funding away from high-carbon industries.
This article is part of our 2021 Global Bank Review – ESG: Creating a purposeful future, an annual publication by our Global Banks Sector Group which brings together our people who live and breathe banks.
“ESG, especially on environmental aspects, is no longer a regulatory or disclosure issue. Today it is a fundamental element of business strategy with competition and cost of capital implications. This is just as true of banks and asset managers, as it is for utilities and energy companies.”
Once the domain of retail activists and civil society organisations at AGMs, shareholder activism on climate change has entered the mainstream, as banks around the world can attest. In the past few years, institutional and retail shareholders have demonstrated increasing willingness to initiate or support ESG-driven activism in the bank sector globally. Climate change has been a key battleground and, following the 2015 Paris Agreement and its goal to achieve net zero carbon emissions by 2050, investors are pressing institutions to shift lending from fossil fuels towards clean energy.
The role of institutional shareholders in climate activism
Globally, institutional shareholders have made clear their expectations that the world’s largest corporations set and disclose ambitious climate action commitments.
“It is clear that the global shift in investor attention to ESG (in particular, climate issues) and the greater focus on such issues by regulators as a result have increased pressure on banks to reconsider their lending policies.”
Notably, Climate Action 100+ (CA100+), the influential investor group which is stated to have 617 members controlling US$55 trillion in assets across 33 markets, has targeted “climate exposed” companies with the highest combined greenhouse gas emissions. CA100+ and similar groups are seeking commitments from boards and senior management to reduce greenhouse gas emissions and implement strong governance, risk management and disclosure frameworks.
While banks are not a primary focus of the CA100+ target list currently, the Net Zero Company Benchmark developed by the group is rapidly gaining traction and informing broader climate policies such as the Institutional Investors Group on Climate Change and the Australian Council of Superannuation Investors. Large institutional shareholders are also showing their readiness to be involved in driving outcomes on these issues, including with respect to their voting intentions in relation to ESG related matters.
“Globally, institutional shareholders have made clear their expectations that the world’s largest corporations set and disclose ambitious climate action commitments."
What does the future hold for climate activism in the banking sector?
It is clear that the global shift in investor attention to ESG (in particular, climate issues) and the greater focus on such issues by regulators as a result have increased pressure on banks to reconsider their lending policies.
However, unlike other sectors, climate change activism targeting banks has thus far been mostly limited to groups of institutional shareholders voicing concerns rather than one individual fund making climate change demands as part of a broader investment thesis.
At this stage, this is likely due to the fact that activists are today focusing on individually pressuring companies to make change happen rather than their lenders. Should sectors not change at the pace pushed for by activists, as exemplified by developments at major energy companies, funds may turn their attention to financing players. In any case, with the continued rise in activist campaigns targeting the world’s largest financial institutions observed in 2021 to date, banks are likely to remain at the forefront of this emerging trend.