Can We Trust the banks?

Japanese banks are failing to adequately disclose climate risk

Japan’s three largest commercial financial institutions, Sumitomo Mitsui Financial Group (SMFG), Mitsubishi UFJ Financial Group (MUFG), and Mizuho Financial Group (Mizuho) have failed to sufficiently disclose climate-related risks and their impacts on the banks’ business strategies, contrary to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

This lack of information leaves investors with questions about the extent to which these banks are exposed to climate-related risks and their ability to perform in a scenario which meets the goals of the Paris Agreement.


Key Findings


MUFG, SMFG and Mizuho are lagging in disclosing climate risk as recommended by the TCFD, omitting significant information:

  • The banks have failed to identify or assess climate related risk as a material business risk, one of the core issues raised by the TCFD.
  • The banks have failed to describe the impacts of climate-related physical or transition risks on their business strategies.  Without this strategically significant information, investors in the banks are unable to evaluate the climate-related risks in their own portfolios.
  • The banks have failed to publish an analysis of the company’s performance under various scenarios, including one compliant with the goals of the Paris Agreement (limiting global warming to 1.5 degrees Celsius). Without this information, investors are unable to assess how these banks are positioning themselves in light of climate-related risks and opportunities.

What is known about the carbon exposure of these banks indicates a possible misalignment between the banks’ strategy and the goals of the Paris Agreement, given the banks’ current fossil fuel lending and significant involvement in new fossil fuel projects.  This lending exposes the banks to transition risk owing to international efforts to meet the goals of the Paris Agreement, where We have no room to build anything that emits CO2 emissions.”

Nevertheless, SMBC, MUFG, and Mizuho are collectively in line to provide financial support for a total of nine new power projects, resulting in 1.4 billion tonnes of CO2 emissions over their lifetimes. 

Investors must hold the banks accountable to the TCFD recommendations, and escalate climate risk disclosure in their engagement programs.

Adequacy of climate risk disclosure

TCFD RecommendationTCFD ElementMUFGSMFGMizuho
Describe board's oversight of climate-related risks and opportunitiesGovernance

Describe management's role in assessing and managing climate-related risks and opportunities

Describe climate-related risks and opportunities over the short, medium and long-termStrategy

Describe impact of climate-related risks and opportunities on businesses, strategy and financial planning

Resilience of strategy to scenarios including 2 degrees or lower

Processes for identifying and assessing climate-related risksRisk Management

Processes for managing climate-related risks

Processes for identifying, assessing and managing climate-related risks are integrated into overall risk management

Metrics used to assess climate-related risks and opportunitiesMetrics and Targets

Scope 1, 2 and 3 greenhouse gas emissions and related risks

Targets used to manage climate-related risks and opportunities and performance against targets

= Yes

= Unclear/Limited

= No

Background

What is the TCFD?

The TCFD was a initiative of the G20 Financial Stability Board (FSB), which was set up in the wake of the 2008 financial crisis to try to avoid similar market shocks. In a landmark 2015 speech, FSB Chair Mark Carney stated “Shifts in our climate bring potentially profound implications for… financial stability and the economy.”

The TCFD released its final recommendations in June 2017.  As of September 2018, the recommendations have the support of 513 organisations.

“Increasing transparency makes markets more efficient, and economies more stable and resilient.”Michael R. Bloomberg, TCFD Chair

The recommendations seek improved disclosure of climate-related information by the financial sector which “would enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks”, in order to make “informed financial decisions.” The finance sector has been identified by the TCFD as a sector potentially most affected by climate change.

The financial risks identified by the TCFD include

  • physical risks, such as the impacts of extreme weather events and long-term shifts in climate altering the value of assets and commodities, and,
  • transition risks, which include market, technology and regulatory change, and the potential for reputational and legal costs.

Source: TCFD Final Recommendations

How does the TCFD compare to the CDP?

The TCFD framework recommends companies incorporate climate risk disclosures into mainstream annual financial reporting, and can be held accountable for their contents.  By contrast, the CDP seeks companies to respond directly to to questions put by the CDP.

What does the TCFD mean for banks?

Banks can accumulate these climate-related risks and opportunities through their operations and financial intermediary activities such as:

  1. their project lending, and
  2. their loans to or underwriting or trading of securities of companies exposed to climate-related risk including large fossil fuel producers or intensive fossil fuel consumers. 

As such, as part of climate-related disclosures, the TCFD Supplemental Guidance for the Financial Sector (Supplemental Guidance) states:

Banks should describe significant concentrations of credit exposure to carbon-related assets. Additionally, banks should consider disclosing their climate-related risks (transition and physical) in their lending and other financial intermediary business activities.

What does the TCFD mean for investors and companies?

The TCFD recommendations give investors a consistent comprehensive framework through which they can analyse the climate risk exposure of the companies they invest in, or those they are considering investing in.

With this increased understanding of risk, investors are able to make more informed decisions about capital allocation.

In turn, companies, including banks, are incentivised to better consider and reduce the risks posed to their business by climate change. Companies that can’t demonstrate how they plan to survive in a carbon-constrained economy risk facing decisive action from investors, including divestment.

Results

Governance

Strategy

Risk Management

Metrics and Targets

Banks Scorecard

= Yes

= Unclear/Limited

= No

TCFD RecommendationTCFD ElementMUFGSMFGMizuho
Describe board's oversight of climate-related risks and opportunitiesGovernance

Describe management's role in assessing and managing climate-related risks and opportunities

Describe climate-related risks and opportunities over the short, medium and long-termStrategy

Describe impact of climate-related risks and opportunities on businesses, strategy and financial planning

Resilience of strategy to scenarios including 2 degrees or lower

Processes for identifying and assessing climate-related risksRisk Management

Processes for managing climate-related risks

Processes for identifying, assessing and managing climate-related risks are integrated into overall risk management

Metrics used to assess climate-related risks and opportunitiesMetrics and Targets

Scope 1, 2 and 3 greenhouse gas emissions and related risks

Targets used to manage climate-related risks and opportunities and performance against targets

What we know about Banks’
Current Carbon Exposure does not align with Paris


The fact remains that any new credit exposure to coal power projects faces transition risk due to international efforts to meet the goals of the Paris Agreement. This international treaty has been ratified by 184 countries including Japan.

The Executive Director of the International Energy Agency has stated that to limit temperature rises to 2ºC, let alone the 1.5ºC scientists recommend, “We have no room to build anything that emits CO2 emissions.” Oxford University researchers have found that in addition to no pipeline CO2 emitting power plants being built, over 20% of current global capacity would have to be stranded to meet the goals of the Paris climate agreement.

Fossil Fuel Exposure

A report commissioned by 350.org Japan indicated that 61 financial institutions provided loans and underwritings to fossil fuel companies amounting to approximately $109.9 billion USD between 2011 and 2016.  Mizuho, MUFG and SMFG provided approximately 82.9 billion (75% of the lending).

Mizuho
US$38.4 billion
MUFG
US$25.5 billion
SMFG
US$19 billion

Coal Exposure

From 2016 to 2018, the banks have been a key financers of the top 120 coal power development companies which are responsible for over 68% of the the new coal-fired capacity in the pipeline.

Mizuho, MUFG and SMFG ranked 1st, 2nd and 4th in lending to these expansionist coal developers.

Mizuho
US$12.8 billion
MUFG
US$10 billion
SMFG
US$4,2 billion

Pipeline coal-fired power projects

Based on publicly available financial information, SMFG, MUFG, and Mizuho are collectively in line to provide financial support for a total of nine power projects (pipeline projects).  These projects have not reached financial close, but the banks are providing advisory services or part of syndicates considering providing finance.

These potential projects represent a total capacity of 8.8 GW of coal-fired power. These projects, if built, would produce total CO2 emissions of 1.4 billion tonnes. 

Number of projects bank is reportedly involved with; capacity
SMBC - 7 projects; 6.4GW
MUFG - 5 projects; 5.2GW
Mizuho - 4 projects; 4GW

While these banks’ policies on coal-fired power projects effectively rule them out of power stations that are not ultra-supercritical, the banks have not publicly distanced themselves from these pipeline projects.

What should investors do?


Investors are calling for robust climate risk disclosure from the markets they invest in. Over 250 institutional investors, managing over US$32 trillion, are driving the Climate Action 100+ initiative. The project aims to “engage with the world’s largest corporate greenhouse gas emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.”

Shareholders are also starting to become more active in voting for climate risk disclosure. Recently, one such resolution related to Exxon Mobil passed, attracting 62% of the vote from shareholders despite Exxon’s board recommending shareholders vote against it.

As MUFG, SMFG and Mizuho are lagging in disclosing climate risk, failing to even identify or assess climate related risk as a material business risk or describe the impacts of climate-related physical or transition risks on their business strategies, investors in the banks are unable to evaluate the climate-related risks in their own portfolios.

As the banks have not published an analysis of the company’s performance under various scenarios for future climate change, investors are unable to assess how these banks are positioning themselves in light of climate-related risks and opportunities.

Given what is known about the fossil fuel exposure of these banks, and the significant pipeline of coal-fired power projects that they involved in, investors would have cause for concern about a misalignment between the banks’ strategy and the goals of the Paris Agreement, and the risks these may present to the banks.

In order to obtain necessary climate risk disclosure, investors must hold these banks accountable, and escalate climate risk disclosure in their engagement programs.