- Banks are highly regulated institutions and they are under public scrutiny. They increasingly have to demonstrate that environmental, social, and governance (ESG) subjects are at the top of their agenda.
- We caution that there are perception risks for banks which fail to address such subjects. They could end up with a damaged image and reputation which could in term harm their franchise. We deem the opposite is true for banks which are the most advanced on ESG subjects.
- While we strongly believe that governance is crucial for banks, they also need to address environment and social subjects, notably with the key question of climate change and energy transition financing.
- In this report, we focus on environmental subjects which we deem are relevant for banks. Bearing in mind that banks are also actors in energy transition through their role as lenders to the real economy.
- In a nutshell, when it comes to climate change, we believe banks are more exposed to transition risk rather than physical risk, at least for now:
- In the short term, we see more risks than opportunities for banks. There is a key question of costs to implement systems designed for measuring and monitoring their exposure to transition risk. This includes the green asset ratio for European banks and its implementation.
- In the long run, we see opportunities with regard to energy transition financing. We also believe that banks’ reputations and image will eventually be at stake should they either successfully address or fail to address these risks.