CLIMATE change poses risks for banks on several levels: it can directly affect their finances, tarnish their image and land them in the courtroom.

Nongovernmental organizations regularly criticize banks for moving so quickly to take climate change into account.

The latest of these is Reclaim Finance, which, along with many other NGOs, targeted European banks just days before the COP 29 UN climate summit, which starts on November 11 in Baku, the capital of Azerbaijan.

Financial risk

Banks that continue to finance fossil fuel projects even as part of the transition to a green economy continue to link their fortunes with the sector.

In an October 2022 report, Finance Watch calculated that the world’s 60 largest banks have approximately US$1.35 trillion in fossil fuel assets on their books.

There have been no major changes since then, according to Thierry Philipponnat, the NGO’s chief economist. The problem is that “there’s no scenario where fossil fuels will have any value in 50 years,” he said.

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Nations agreed to move away from fossil fuels at the COP28 climate summit in Dubai last year.

The International Energy Agency also expects demand for oil, gas and coal to peak by 2030.

Laurence Scialom, an economics professor at the University of Paris-Nanterre, warned that “all asset classes will deteriorate overnight.”

He warned that banks that hold shares and bonds of fossil fuel companies in their portfolios will decrease in value, and that fossil fuel companies may become a credit risk as the profitability of the sector tightens.

Prof Scialom said the fossil fuel industry represented a “financial time bomb” for banks and they were still underestimating the danger.

Home mortgages are also at risk. US consultancy Bain & Company warned last year that wildfires, drought and other climate risks threaten 10 to 15 per cent of the value of real estate portfolios held by the world’s 50 largest banks.

reputation risk

Studies conducted by NGOs such as Finance Watch and Reclaim Finance evaluating bank loans in light of climate change are regularly used by the media and are beginning to tarnish their public image.

Other groups have opted for more direct action, such as disrupting shareholder meetings or demonstrating in front of headquarters buildings, to draw attention to lenders’ behavior.

These “naming and shaming” campaigns can be a powerful weapon for pressure groups, as banks depend heavily on the trust of customers.

Legal risks

NGOs have already challenged fossil fuel companies in court; The most notable success to date has been the victory of the Dutch branch of Friends of the Earth against Shell in 2021.

Judges at the Hague District Court ruled three years ago that Shell must cut its carbon emissions by 45 percent by 2030 because they contribute to the “horrific” effects of climate change.

The decision was seen as a historic victory for climate change campaigners as it marked the first time a company had aligned its policy with the 2015 Paris climate change agreements. Shell is appealing the decision.

Activists are now turning to banks.

In January this year, the Dutch branch of Friends of the Earth launched a lawsuit against ING, the largest Dutch bank, for financing highly polluting companies.

Then in February, Friends of the Earth, Oxfam France and another NGO sued BNP Paribas, accusing it of contributing to climate change by financing fossil fuel firms.

Valerie Demeure, who leads research on ESG issues at Ofi Invest Asset Management, said the cases were “definitely the beginning of a series”.

French law allows environmental activists to challenge companies. Since 2017, major French companies have been required to take effective measures throughout their supply chains to respect human rights and minimize damage to the environment. AFP