Climate change on a 'slow simmer' in bank lending decisions
Auckland protesters marched down Queen Street demanding global leaders take measures to address the climate crisis. Photo / Getty Images COMMENT: The three major Australian banks, which own three of New Zealand's largest banks, undoubtedly had much more pressing scandals to address at their annual meetings last month, but the role they could play in mitigating climate change promises to be an issue that won't go away. Westpac's more than six-hour meeting in Sydney set the table for the sector with chair Lindsay Maxsted having to face shareholder ire on learning that their bank had processed more than 23 million transactions in breach of anti-money laundering and counter-terrorism finance laws, including facilitating transactions enabling child exploitation in the Philippines. READ MORE: 'I think it's a load of BS': Pauline Hanson wants climate change left out of bushfires royal commission Why tennis superstar Roger Federer is copping heat over climate change Revealed: NZ's new climate change commissioners Australia, your country is burning dangerous climate change is here with you now But while the bulk of the meeting's time was spent on this and other of Westpac's corporate cultural shortcomings, climate change loomed large on the meeting's agenda, as it also did at ANZ Bank and National Australia Bank's AGMs. "This is an important matter for many shareholders," Maxsted acknowledged before inviting an address from a representative of the lobby group, Market Forces, that got two climate-change resolutions onto the agendas of all three bank meetings. Westpac included a lengthy exposition of its position on climate change in its notice of meeting. "Westpac has long recognised the threat of climate change, is committed to playing its role to respond and provides shareholders with detailed information about the steps that it has taken and will take going forward," the notice said. Further, it said that climate change "is one of the most significant issues that will impact the long-term prosperity of our economy and way of life," and went on to itemise its response, including having been the first of Australia's major banks to release in 2008 a position statement on the matter. The bank noted its lending to the coal sector at March 31, 2019 averaged just 0.1 per cent of total lending and the majority of that was weighted to metallurgical coal coal used to make steel as opposed to thermal coal coal used to generate electricity. In explaining their resolutions, Market Forces said Westpac's total committed exposure to coal mining had risen to A$1.4 billion in 2018 from A$1.3 billion in 2015. "Westpac continues to finance the expansion of the fossil fuel industry," it said, itemising lending including Westpac's participation in a A$720 million deal in 2018 under which Coronado Global Resources supplies thermal coal to a power station in Queensland that is expected to remain operating well beyond the investor-backed deadline for OECD countries to phase out thermal coal power by 2030. It also detailed lending to Whitehaven Coal, Woodside Petroleum and a gasfield development in Papua New Guinea. The spokesperson for the group reminded shareholders that they were meeting amid "unprecedented bush fires, a record-breaking drought, combined with blistering heatwaves" and that "this is not normal. This is climate change. "The decisions that our company and this board make about Westpac's lending to coal, oil and gas projects will have huge impacts on those communities already bearing the consequences of continued funding of fossil fuels." The first resolution, aimed at making it easier for shareholders to get resolutions added to AGM agendas, failed with just over 8 per cent of the shares voted in support and nearly 92 per cent voted against. However, that was still a sizeable chunk of 130.6 million shares. While the second resolution had been dependent on the first passing, and therefore wasn't put to the meeting, proxy votes in favour for more than double that number of shares, or 267.4 million, were lodged ahead of the meeting. Voting patterns on similar resolutions put to the ANZ and NAB meetings were substantially the same, suggesting either that shareholders hadn't grasped the fact that subsequent resolutions were dependent on the first passing, and/or shareholders hadn't wanted to hamstring bank boards but did want to send a message that they need to take climate change seriously. The meetings' focus on climate change bear out the findings of a report by Fitch Ratings published last month on the growing influence of environmental, social and governance factors on bank lending decisions. "About half of the lending assets covered by the 182 banks in 49 countries that took part in Fitch's ESG survey in the third quarter of 2019 had been screened by the banks for ESG risks," Fitch said in its report. "Ratings impacts on corporates due to ESG-related bank funding decisions are still rare but some sectors, such as those affected by emissions regulations and the rising cost of carbon, may find it harder to obtain bank funding in the longer term," it said. "Transition funding," lending to enable companies to mitigate climate-change risk "is likely to become a vital route to obtain bank funding." However, Fitch doesn't think borrowers with higher ESG risk will struggle to obtain bank or other funding, such as via capital markets. Rather than outright deal rejection, consideration of ESG factors are likely to result in greater due diligence. "The banks in our survey cited their company policies and regulation as the most common drivers for incorporating ESG into their underwriting processes," Fitch said. "Reputation and litigation risks also appear to be important factors, with several banks citing stakeholder or investor pressure as their main driver to screen for ESG risk." Of the banks surveyed, 13 per cent attributed the increased use of ESG in lending decisions to shareholder pressure, with another 27 per cent citing regulation. Interestingly, only 23 per cent cited the bank's own credit or risk appetite as the most important driver in making ESG-related decisions. Consistent with the evidence of the three Australian bank AGMs, the extractive metals and mining sector was the most likely to be scrutinised by banks for environmental risks with companies involved in chemicals and fertilisers the next most scrutinised. "The main 'no-go' area that banks flagged was transactions carrying a high risk of human rights violations, although these are rare," Fitch said. Not rare enough, Westpac's shareholders might retort. "Many banks, particularly in western Europe, also prohibit new project financing for thermal coal mining and coal-fired power stations," Fitch said. Fitch noted its survey results varied by bank size and region with larger banks much more likely then their smaller peers to apply ESG policies to lending decisions and that banks is Africa, Latin America and western Europe generally more likely to apply such considerations than banks in North America and Asia-Pacific. Former Bank of New Zealand chief economist Tony Alexander noted in his latest newsletter that a coming change, "starting at a really low simmer," is that central banks around the world are focusing on lending to sectors with high levels of carbon emissions and this "will eventually reduce credit available to businesses and locations most at risk from the effects of climate change." Banking regulators are developing new stress tests for banks that go beyond scenarios such as plunging house prices or dairy prices or a leap in unemployment to consider the impact of a range of climate change scenarios. "The outcome of the test may eventually entail some mix of higher capital, repricing of lending to some sectors." In New Zealand's case, that could mean less finance available to the farming sector, the country's largest emitter. The Australian Securities and Investments Commission has already announced that companies will have to tell shareholders and customers about the risks to their firms from climate change. "The time-frame is unclear, but the message isn't. You need to explicitly take climate change into account when you consider your investments, your home purchase and your business," Alexander said. "Is your location at increasing risk of inundation, be it pluvial, fluvial or coastal? One day you might not be able to get insurance and potential buyers may not be able to get a mortgage." The Reserve Bank of New Zealand has already put banks and other companies on notice that climate change is looming larger in the minds of Kiwi regulators. In November, RBNZ announced that climate change "to facilitate a smooth transition to a low-carbon and climate-resilient economy, while supporting the soundness and efficiency of the financial system" - was top of the list of priorities for New Zealand's Council of Financial Regulators.' That group includes the Financial Markets Authority, which alternates with RBNZ as council chair, the Commerce Commission, Treasury and the Ministry of Business, Innovation and Employment. - BusinessDesk Wise is calling for changes to transparency around foreign exchange fees.