European Banks’ Next Big Problem? The CO₂ in Their Loan Books

By Marion Halftermeyer, Nicholas Comfort and Demetrios Pogkas

June 1, 2021, 12:00 AM EDT

European banks spent almost a decade claiming they’re part of the fight against climate change. Now, investors and regulators want them to prove it.

For the first time, many banks are publishing relevant data this year on criteria such as lending to fossil fuel industries, as Europe’s central banks scrutinize their loan books and threaten higher capital requirements for those with excessive climate risks.

Bloomberg News analyzed annual reports and similar filings from a selection of Europe’s major banks. While they’re giving hard numbers on the money loaned to companies that will be challenged as the world tries to reduce CO₂ output and avoid climate disaster, the disclosures provide a limited view into only a portion of their business.

For example, there is no one set of disclosure standards that banks are obliged to follow and they differ on how to measure key information and what they should release publicly. As a result, investors, regulators and the public would face difficulty in determining which lenders face the highest risks and are taking the most determined action.

Banks in the group below made the greatest efforts to give proper context to their data. They disclosed figures that incorporate an analysis of the climate risk embedded in their loan books, although each bank uses its own metric to measure exposure. They included industries that aren’t the most obvious culprits of climate risk and also offered greater granularity by explicitly specifying climate-risk exposure in sub-sectors.

Barclays U.K.

Uses “elevated risk from climate change” as its metric, but says that the data does not show the carbon intensity

Is among the banks with highest disclosed exposure to oil and gas; which it breaks out in subsectors such as extraction, marketing and services

Disclosed exposure to climate risk:

6.5% of total loans, advances and commitments

$59.9 billion

Credit Suisse Switzerland

Uses “carbon-related and climate-sensitive” as its metric, and does not reflect collateral and other credit risk mitigation

Separates coal from metals and mining and differentiates between subcategories within the industrials sector that have different climate risks

Disclosed exposure to climate risk:

17.6% of total potential exposure

$83.0 billion

UBS Switzerland

Uses “climate-sensitive” as its metric, rather than disclosing carbon intensity

Has the most granular breakdown; for example, provides exposure to cattle (under food and agriculture below)

Has a smaller corporate loan book than other banks due to focus on wealth management

Disclosed exposure to climate risk:

13.7% of gross exposure

$38.8 billion

These banks only offer analysis on their exposure to a selection of broad sectors that have climate change-risk or are carbon intensive. They often lumped several such sectors together. Each bank used its own metric, and UniCredit only disclosed data for half of 2020.

Deutsche Bank Germany

Uses “most carbon intensive industries” as its metric

Doesn’t disclose certain exposures to transition risk sectors like automotive

Oil and gas exposure principally to majors and national players, with minimal risks related to U.S. shale

Disclosed exposure to climate risk:

5.1% of overall loan utilisation of group

$28.1 billion

HSBC U.K.

Uses “transition risk” as its metric, does not measure carbon intensity of its lending

Data also includes green and sustainable finance loans to clients for moving to low-carbon business models, obscuring the financed carbon footprint

Doesn’t give specifics for coal or subsectors in the oil and gas industry

Disclosed exposure to climate risk:

11.6% of total loans and advances to customers and banks

$131.9 billion

Santander Spain

Uses “most concerning sectors” as its metric, analyzing sectors with transition risk and are carbon intensive

Classifies several other sectors as medium risk, but reports them in aggregate

Exposure calculations also include undrawn facilities and off-balance sheet loans, guarantees and derivatives

Disclosed exposure to climate risk:

8.1% of gross loans and advances to customers

$92.7 billion

UniCredit Italy

Uses “climate risk” as its metric, and only discloses exposure for five subsectors without specifying carbon intensity

Data is as of the first half of 2020

Provides a limited amount of qualitative information on the evolution of the portfolios and positioning versus other banks globally

Disclosed exposure to climate risk:

2.2% of group exposure

$30.6 billion

France’s top investment banks have so far provided limited meaningful data—disclosing loans to all sectors equally, without providing an analysis of carbon intensity or climate risk. For BNP and Societe Generale, the graphic below shows a selection of sectors that include companies at risk from climate change.

BNP France

Doesn’t break out shipping loans despite being one of the industry’s main lenders

Highest disclosed exposure to agriculture and transportation of the banks in sample

Oil and gas figure below was provided by a spokesperson and is available in some filings; the bank doesn’t separate it from other energy in its sector breakdown

Loan disclosures by sector:

12.1% of total gross commitments, on and off balance sheet, unweighted

$262.5 billion

Societe Generale France

Says data that would further detail its exposure is confidential

In October 2020 published an assessment of “transition risk” for seven sectors with climate vulnerability on data from 2018; no more recent data is available

Loan disclosures by sector:

8.3% of total on- and off-balance sheet exposure measured in ead

$101.3 billion

Note: Exposure percentages have been calculated on wider metrics, such as total loan book or total potential exposure, instead of corporate loans alone (which would produce higher shares) because not all banks disclose comparable data for the latter. Bloomberg News also analyzed filings from ING but because the bank has not yet published figures for 2020, it was not included in the graphic.

Source: Company filings

Investors may want to be wary of banks that appear at first glance to have limited exposure to climate risks. Banks that don’t disclose a lot of details could be perceived as less exposed to risks from climate change or so-called transition risks, such as regulatory or policy changes that jeopardize profits at carbon-intensive corporate clients.

“Transparency encourages banks to look better, be more capitalized, have better liquidity and hopefully also eventually re-orienting capital flows to sustainable investments,” said Pilar Gutierrez, an official at the European Banking Authority, a regulator that’s working on a common standard for comparing banks’ green assets.

Some banks fail to disclose risks beyond their most carbon-intensive clients. In a recent study of 29 banks, the EBA found that 58% of their total exposure to big companies was in sectors that could be sensitive to transition risks.

There’s also the question of how to account for business not held on their balance sheet, like trading securities or advising on a transaction such as a merger between two fossil-fuel companies.

Even if lenders tackle the risk in their books, the reality is that banks are still often helping some of the biggest polluters in other, indirect ways. That might, for example, include helping them raise money on the debt markets.

In the five years through 2020, the bonds that Europe’s major banks issued for the oil and gas industry exceeded the green debt they raised for companies across all sectors by $83 billion. Yet the mix varies: Credit Suisse issued more than three times as much for oil and gas firms than it did green bonds, while almost the opposite is the case at ING.

Note: Figures for green and sustainable bonds include bonds issued by companies of all sectors. Figures for oil and gas corporate bonds exclude bonds that aren’t green or sustainable.

Source: Bloomberg League Tables

For now, banks say they’re confident they can make the pivot to greener finance permanent. They’re building on the green and sustainability-linked financing issued for companies to fund environmentally-friendly projects, linking loans and other funding to specific metrics. The targeted nature of such financing also intends to push companies with a big carbon footprint to focus on business that doesn’t harm the planet.

“You don’t have a magic wand that changes one to the other,” Lars Machenil, finance chief at BNP Paribas, said in a Bloomberg TV interview. “If we have sectors that are developing, we are accompanying them. This is not just wishful thinking. We make sure there are targets on how to get there.”

In the meantime, regulators are ramping up the pressure. In June, the Bank of England will test the financial system’s resilience to various different climate scenarios while the European Central Bank has told eurozone banks to improve their understanding of climate-related risks ahead of a so-called stress test next year.

While better disclosures will push banks to be more open and honest in the battle against climate change, the data is just one side of the story. Some lenders are also moving ahead with organizational changes such as appointing dedicated chief sustainability officers to help drive the shift internally and signal the need for change.

Then, of course, there’s the question of making money out of the new opportunities coming about because of the changes. Investment bankers used to advising on mergers and share sales are now helping executives to factor in environmental risks in transactions and incorporate sustainability into overall strategy. Many banks have set up so-called transition teams and will eventually be able to quantify how much revenue they can make off of such advisory business.

Note: The table includes a selection of metrics and not an exhaustive list of banks’ sustainability efforts. HSBC and Santander have global heads responsible for the banks’ respective sustainability agendas but those individuals do not sit on the executive board.

Source: Company filings, company websites, company spokespeople

While there’s no standard way of measuring the carbon intensity of capital markets businesses at present, banks such as Barclays and Credit Suisse are beginning to lay the groundwork.

Plenty of issues still remain in banks’ reporting of sustainability issues. Banks will need to think about how they create liquidity for the stocks and bonds of dirty companies through their trading desks and how that can be wound down. Most European banks with asset management arms are already offering ESG-specific funds or integrating such criteria in investment decisions for all funds they offer. Deutsche Bank has gone further and plans to provide preliminary estimates for emissions in its traded credit portfolio in the second half of this year.

“The sands are moving faster than some institutions realize,” said Michael Browne, a fund manager at Martin Currie, part of Franklin Templeton Group in London. “Your cost of capital will go up if you’re not hitting your ESG issues.”

BNP corrects to show it discloses oil and gas exposure in some filings, has a person responsible for its sustainability strategy on its executive board

With assistance from: Maia Godemer and Tyler Kazio

Edited by: Dale Crofts and Jeremy Scott Diamond

Methodology and notes on data

Climate-risk exposure: Bloomberg used data from banks’ annual reports and similar filings to show exposure to industries that are either carbon-intensive or subject to risks related to the transition to a lower carbon economy. BNP Paribas and Societe Generale don’t provide that information, so we used a broader breakdown of their balance sheets. In some cases, the exposure figures include loans that are intended to help companies become less polluting. Some figures might not add up due to rounding.

Green and sustainable bonds versus oil and gas corporate bonds: “Green bonds” denotes money raised that is earmarked for climate and environmental projects. “Sustainable bonds” are those where the proceeds are earmarked for green and/or social projects and where the issuer generally provides updates on the project to investors. “Oil and gas bonds” includes companies in sectors such as exploration, production, services, equipment, refining, marketing and pipelines. Included are bonds where the 10 European banks in our analysis had a role in raising the debt. Duplicate bonds have been consolidated.

Green Initiatives Return to the graphic

Metric definitions and notes: “Sustainability Officer on executive board”: The bank has a person in charge of managing the sustainability agenda and its implementation, and sits on the executive board. HSBC and Santander have global heads responsible for the banks’ respective sustainability agendas but those individuals do not sit on the executive board. “Coal and Arctic oil policies”: Refers to if the bank has specific policies to limit or reduce financing to coal-fired power plants, coal mining, thermal coal, the Arctic oil sector, unconventional oil and gas, and deepwater drilling. “Numeric targets to cut financed emissions”: Refers to if the bank went beyond the policies outlined for the above metric, and set specific numerical targets to reduce financing to sectors that are carbon intensive or have high transition risks when it comes to climate change. Four banks stand out: Barclays plans to reduce the carbon intensity of its financing portfolio to the power sector by 30% by 2025 and plans to reduce the absolute emissions of its energy financing portfolio by 15% by 2025. BNP Paribas has made an initial commitment to reduce its credit exposure to oil and gas exploration and production activities by 10% by 2025. ING has committed to reduce financing to the upstream oil and gas sector by 19% by 2040 against 2019 levels. Societe Generale plans to reduce the carbon intensity of its financing activities linked to the electricity production sectors by 18% by 2025 and by 76% by 2040, against 2019 levels. Several others disclosed that they are developing targets and have plans to publish at a later stage. Credit Suisse is developing targets in 2021 and 2022. Deutsche Bank will disclose current portfolio emissions, intensity and targets for key sectors at the end of next year. HSBC has a public commitment to publish its targets, currently in development, in 2021. Santander plans to publish decarbonization targets for sectors including oil & gas, transport, and mining & metals no later than September 2022. UniCredit is developing targets. “Data on transition-risk lending”: The bank discloses and breaks down by sector its loan book to show its exposures to sectors that are at risk of climate change and/or have high transition risk. “Data on carbon-intensive lending”: The bank specifically discloses the carbon-intensiveness of its loan book by breaking it out by sector. “Helps polluting clients clean up”: The bank has a dedicated team in its investment or corporate bank to help corporate clients assess their risks with respect to climate change and to help those companies transition to a less carbon-intensive business model. “Tries to capture capital markets exposure”: The bank is attempting to quantify climate-risk and carbon exposure generated from its capital markets activities (outside of the loans often provided alongside advisory). Only Barclays is actively calculating for exposure found in its capital markets activity via its proprietary BlueTrack methodology. Both Credit Suisse and Santander have said they are exploring their approach to capturing their capital markets activity exposure. For the moment, there is no clear and consistent methodology for accounting for a bank’s role in providing advisory services, such as M&A, ECM and DCM, and how that contributes to supporting the existence of carbon-intensive/climate risky companies. “Tries to capture trading exposure”: The bank is attempting to quantify climate-risk and carbon exposure generated from trading securities and creating liquid capital markets for companies that are carbon intensive or have transition risk. Deutsche Bank is doing preparatory work to estimate emissions in the traded credit portfolio, which includes loans, bonds and related derivatives, and expects preliminary estimates to be available in the second half of 2021. Santander intends to get involved in carbon credit trading as part of its mitigation efforts. For the moment, there is no clear and consistent methodology for accounting for a bank’s role in trading corporate securities, such as equities and bonds, thereby creating liquid capital markets for those companies and how that contributes to supporting the existence of carbon-intensive/climate risky companies. “Renewable energy financing targets”: The bank has a specific numerical target to increase financing to the renewable energy sector: BNP: €20 billion of financing by the end of 2023; Societe Generale: €20 billion by 2023 in the form of financing and consulting; UniCredit: More than €9 billion in financing by 2023 towards renewable energy companies like biomass, hydro, photovoltaic, wind, CHP, battery storage and energy from waste.

Methodology: The metrics selected do not represent an exhaustive list of efforts that banks are undertaking to help mitigate climate change. The metrics were selected based on conversations with experts in the field, an overview of relevant recent studies by NGOs and advocacy groups on banks’ role in achieving net zero emissions goals, and a review of the banks’ published sustainability and ESG related documentation. The metrics selected were done so in an effort to showcase what the banks are already doing and where more work is needed, particularly with respect to capturing their role outside lending books. Methodology to capture exposure is still evolving and banks still need to develop consistent ways of measuring for exposure that are comparable across the industry. Banks received ticks when they fulfilled the metrics definition. Information was collected from the banks’ published reports and by confirmation with the banks’ respective spokespeople. Return to the graphic

European Banks’ Next Big Problem? The CO2 in Their Loan Books

Carbon Priority

Green Initiatives

European Banks’ Next Big Problem? The CO₂ in Their Loan Books