U.S. banks are taking too narrow of an approach when disclosing their exposure to climate risk and are potentially underestimating possible losses, according to a report released Monday.
Bank disclosures tend to focus on direct loans to the fossil-fuel sector or the electricity industry, but their exposure is much broader, Ceres, a nonprofit organization focused on sustainability, said in its report. More than half of banks' syndicated-lending portfolios carry climate risk because they include loans to sectors including agriculture, manufacturing and transportation, the report found.
"Banks, their investors, their directors, their regulators and their customers should be concerned," Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, said in an interview. "In addition to the important climate issues, they should be concerned for the fiduciary responsibility and the financial health of the banks."
Banks have been taking steps to reduce climate risks. JPMorgan Chase said last week that it will establish goals for each industry in its portfolio, starting with oil and gas, automotive manufacturing and electric power. Morgan Stanley announced that it will eliminate net carbon emissions from its financing activities by 2050. Citigroup and Bank of America have both released climate-disclosure reports.
Risks from just the fossil fuel and electricity sectors could result in losses of 3% of the average syndicated-lending portfolio, according to the report. That loss risk jumps to 18% when all other climate-related sectors are included. Lenders also face indirect risks from deals with other banks, and major losses could ripple throughout financial networks, the report found. Ceres called on banks to more quickly disclose risks from their full portfolios.
Ceres said its analysis isn't comprehensive because it relies on publicly available lending data. And the report could have underestimated the peril, because it considered just transition risk, which stems from sudden changes in climate regulation or investor and customer sentiments toward climate, while excluding physical risk stemming from climate-fueled natural disasters.
