by Louise Anderson

Welcome back to our Banks, Borrowers, and Climate Change series! In case you missed our introduction to the series, you can read it here. Our first blog in the series, “Banks, Borrowers and Climate Change: How Disclosure of GHG Emissions Will Impact the Lending Process for Publicly Traded Corporations” is also available. The bottom line: The SEC will require public companies, including banks, to disclose annual carbon emissions from their operations in their annual report.

Before we dive into the details of the PCAF’s Global GHG Accounting and Reporting Standard, we are first going to discuss one of the many complementary initiatives that collaborated with PCAF, the Climate Action in Financial Institutions initiative.

In 2015 at the UN Climate Change Conference (COP 21), a group of 26 financial institutions addressed the threat climate change poses to financial stability by starting the Climate Action in Financial Institutions initiative. The initiative “aims to provide public and private financial institutions an opportunity to learn from each other, to disseminate good practice and lessons learned and to collaborate on areas of common interest.” The initiative is based on five voluntary principles that can provide guidance to organizations in the financial sector that want to adapt and mitigate climate change with their business strategies. The principles are as follows:

1. COMMIT to Climate Strategies – Be strategic when addressing climate change. Institutional commitments to address climate change are demonstrated by senior management leadership, explicit strategic priorities, policy commitments and targets, which allow for the integration of climate change considerations within a financial institution’s lending and advisory activities over time.

2. MANAGE Climate Risks – Be active in understanding and managing climate risk. Assess your portfolio, pipeline and new investments. Work with clients to determine appropriate measures for building resilience to climate impacts and improving the long-term sustainability of investments.

3. PROMOTE Climate Smart Objectives – Promote approaches to generating instruments, tools and knowledge on how best to overcome risks and barriers to investment in low-carbon and resilient investments. This may include mobilizing and catalyzing additional financing and developing specialized financing vehicles/ products, such as green bonds, risk sharing mechanisms or blended finance. Engage clients and other stakeholders (e.g., rating agencies, accounting firms) on climate change risks and resilience, and share lessons of experience to help further mainstream climate considerations into activities and investments.

4. IMPROVE Climate Performance – Set up operational tools to improve the climate performance of activities. Financial institutions track and monitor indicators tied to climate change priorities, including GHG [Greenhouse Gas] reporting, lending and advisory volumes supporting green investment, climate related asset allocations, and the institution’s own climate footprint.

5. ACCOUNT for Your Climate Action – Be transparent and report, wherever possible, on the climate performance of your institution, including increases in financing of clean energy, energy efficiency, climate resilience or other climate-related activities and investments. Be transparent and report, wherever possible, the climate footprint of the institutions’ own investment portfolio, and how the institution is addressing climate risk.

There is no fee to join the initiative, and contributions from member institutions are voluntary. Joining gives members, the opportunity to learn from their peers and, in turn, share lessons they have learned about integrating climate risk into their business operations. Moreover, as Mainstreaming Climate in Financial Institutions states, “adopting the Five Voluntary Principles for Mainstreaming is a statement of leadership on climate relevant financing.”

There does not seem to be any doubt financial organizations will need to address climate change as part of their risk management strategy since regulatory changes appear to be forthcoming. In fact, according to an October 2023 press release from the Board of Governors of the Federal Reserve System, federal bank regulatory agencies have already created some principles aimed at climate risk management for financial institutions with assets of $100 billion or more.

Financial institutions that have not yet explored integrating climate risk into their strategies and operations but are looking for a place to start could easily be overwhelmed by the depth and breadth of information available. The Mainstreaming Climate in Financial Institutions website offers a place where organizations can begin to investigate what climate change risk looks like in the financial sector and get some guidance on how they might want to proceed.

NEXT: If the Climate Action in Financial Institutions initiative intrigued you, join us for our next blog, Climate Change and Banking: An Overview of the PCAF Global Accounting and Reporting Standard. In our upcoming blog, we will be reviewing a high-level look at the PCAF’s Global Accounting and Reporting standard. 

How We Can Help

About The EI Group, Inc.
The EI Group, Inc. (EI) provides a comprehensive array of services for the development and execution of new and existing sustainability programs tailored to your business. Our 35+ years of experience in delivering air/water quality permitting/compliance and solid/hazardous waste reduction services or preparing our clients for ISO system third party audits by identifying performance risk/shortfalls for Environmental Management (14001), Occupational Safety and Health (45001) and Energy Management Systems (50001) has provided us the ideal platform to support all of your ESG program needs. EI understands the ever-changing environment and obstacles our clients face to assist in refocusing your company’s business culture to achieve ambitious sustainability goals. Whether you are at the beginning of your sustainability journey or looking for management support in existing ESG program initiatives, EI’s team of experienced professionals are ready to partner with you! Contact Greg Lathan, President
Mike Walker, VP/Principal Engineer, or Hailey McQuaid, ESG Project Manager for details.

About Environmental Risk Innovations (ERI)
ERI is the nation’s premier consulting firm that specializes in the management of environmental risk for commercial lenders. ERI’s clients include a broad base of commercial lenders, from regional banks to banks with national footprints. Since 1999, ERI has been dedicated to providing commercial lenders with effective and efficient due diligence services and guidance. ERI is staffed with environmental professionals whose diverse experience and expertise enables ERI to offer a wide variety of traditional and progressive risk management services.  ERI is not a traditional environmental consulting firm that performs Phase I or Phase II Environmental Site Assessments. As a result, ERI’s recommendations represent a truly independent, third party opinion that conforms to the client bank’s specific risk tolerance. 

ERI’s Physical Climate Risk Assessment is an evaluation aimed at understanding the potential climate-related risks associated with a property. It includes six risk categories: heat, precipitation, drought, wind, fire, and flood. The level of risk related to each risk category will be identified for the property. The Climate Risk Assessment also includes the completion of a Standard Flood Hazard Determination Form in accordance with the Federal Emergency Management Agency (FEMA). This review will determine if the property is situated within a flood zone and assesses the necessity of flood insurance, which is required by most underwriting departments. An ERI Environmental Professional will analyze this data and summarize the findings and potential climate-related risks to the collateral property. If appropriate, ERI will also suggest mitigation measures to maintain or enhance the real estate’s resilience against these risks over time. Contact Greg Lathan, President ([email protected]) and Karen Nelson, Senior Vice President ([email protected]) for details.