The Paris Agreement, which came into force in 2016, aims to limit global warming to 1.5 degrees Celsius by 2100, compared to pre-industrial levels, and to limit the material and social impacts of these changes. This political target is based on scientific research and evidence that shows that an additional increase in the earth’s average temperature would result in irreversible changes such as rising sea levels, biodiversity collapse and climate migration.
In order to incentivize action in the real economy, this target needs to be translated into investment needs, production, and technology changes. According to the United Nations Framework Convention on Climate Change Race to Zero, the investment needs of the coming decade to achieve this objective are approximately $32,000 billion on a global scale, including $6,600 billion in Europe.
European banks finance around 70% of the real economy in Europe. This dominant share of intermediated finance in Europe places them at the forefront of the challenge of decarbonising the economy. Thanks to their ability to transform their clients' deposits into long-term loans to finance capital expenditure, their function is to allocate capital in the most efficient way.
But how can investors understand which banks are effectively helping the economy to decarbonize? The task is not easy as information is scarce. Indeed, until recently the sector was not exposed to regulatory requirements that would consider the banking activities that had the most impact on the environment: their lending portfolio (in terms of GHG emissions, this would be scope 3 category 15 emissions). According to MSCI, approximately 92% of greenhouse gas emissions from financial institutions are here.
You can find more details in our analysis below.