Banks are slightly less exposed to climate-sensitive industries including mining, transportation and warehousing than they were even a few years ago, according to
Last year, average bank exposure to companies that would be harmed in the event of an extreme climate-related shock was about 14% of total assets, down from 16% in 2020 and close to 18% in 2012.
For decades, the physical dangers of climate change — hurricanes, wildfires, earthquakes — have dominated popular attention. But in recent years, shareholders and banking executives have grown concerned about the risks of climate-change transition policies and whether they would weigh on business.
Transition risk refers to "stresses to institutions or sectors" that are likely to result from policies designed for a lower-carbon economy, Michael Gibson, director of supervision and regulation at the Federal Reserve, testified last week.
"Weaknesses in how banks identify, measure, monitor and control climate-related financial risks could adversely affect a bank's safety and soundness,"
Banking leaders have taken stock of their loan portfolios and listened to stakeholders who want fewer loans made to companies and industries that are large carbon emitters.
"Many larger institutions are working to better understand their clients' exposures to climate-related risks, including transition risk, in order to evaluate their own overall potential exposures to climate risk," said Caroline Swett, a banking and climate finance partner at the law firm Debevoise & Plimpton.
The New York Fed researchers modeled the estimated decrease in bank output or profits from specific climate-friendly policies, including the implementation of a carbon tax, and assumed that the value of loan portfolios would decline alongside industry output.
Their results indicate banks' exposure to climate-sensitive industries including coal and oil mining, transportation and warehousing has declined in recent years. The amount of lending to climate-sensitive industries that banks have continued is at a "meaningful but manageable," level, New York Fed researchers found.
The holding companies studied included institutions that have assets of $50 billion or more or any companies that have undergone the Federal Reserve's stress test, according to the research paper.
Researchers considered three scenarios that could be prompted by the transition to a lower-carbon economy.
Researchers assumed that the transition to a lower-carbon economy would prompt economic troubles for industries that are expected to suffer the most from climate change. They modeled the damage to banks' loan portfolios in three scenarios of varying economic severity. The worst-case scenario entailed the bankruptcies of the top 20% of climate-sensitive industries.
More banks are launching climate-friendly lending segments as the needs and preferences of their clients change.
At Amalgamated Financial, climate- and sustainability-focused loans make about a third of the bank's loan portfolio. Lending in the bank's climate segment increased in the second quarter, boosting overall commercial and industrial lending by 28% from a year earlier.
"This is a significant marketing opportunity … given the important urgency and the momentum to address climate change," Amalgamated Bank Chief Executive Priscilla Sims Brown said on a call with analysts earlier this month.
Still, the decline in bank exposure to climate-sensitive industries represents a small step on banks' long journey to lower lending to industries that emit the most carbon. U.S. banks financed almost a third of global fossil-fuel lending in 2022, according to a report from the Rainforest Action Network, an environmental organization.
Regulators are also working to determine the most effective ways to supervise the banking industry, which is unique in its interaction with a variety of other industries. In March 2022, the Securities and Exchange Commission revealed proposed climate disclosure rules that would require companies to publicly report greenhouse gas emissions, but the proposals have yet to be finalized. Yet the proposed requirements will likely face legal challenges, and the implementation of a final rule could be in doubt if President Joe Biden fails to win reelection, Swett said.
The Federal Reserve is currently conducting an analysis of
"We are working rigorously to identify and measure how climate change could increase financial sector vulnerabilities and amplify shocks," Gibson said.
The central bank said it was also working on boosting its understanding of the risks of climate change on the financial institutions it supervises, engaging external experts and keeping a watch on industry developments.
The climate exercise is separate from the Fed's annual stress tests developed in the wake of the 2008 financial crisis. The Fed expects to finish the climate analysis by the end of 2023.
Allissa Kline contributed to this report.
