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Climate Change Risks and Opportunities—From a Banking Perspective
By Dan Sherman

It’s clear that action is needed to mitigate global warming risks, including sea level rise and environmental degradation. When a company or industry makes a change to reduce emissions or environmental impact, it’s big news; but it would be far better if shifts in corporate policy could affect many companies and industries simultaneously. This is the goal of Boston Common Asset Management’s new report entitled “Financing Climate Change: Carbon Risk in the Banking Sector."

Since banks lend money to nearly every industry and they control the terms of the loans they give, they represent the ideal candidates to require environmental or climate-related changes or investments as a requirement of a new loan package. If banks charged higher interest on environmentally unfriendly projects and lower interest on environmentally beneficial ones, it would make the latter relatively cheaper. This, in turn, would lead to companies choosing more environmentally friendly projects.

The benefits for banks are not simply altruistic or PR related. The Boston Common report argues that many banks have been slow to integrate climate change related risks into loan pricing, including increasingly unpredictable and extreme weather, changing regulatory environments, legal concerns, and uncertain demand for high carbon fuels like coal. The report concludes that banks could better protect themselves from such risks.

As we all know, financial markets are designed to pay entities for taking risk with their money—in general the more risk taken, the higher the potential return. Climate change presents a whole host of risks and as such a large set of opportunities as well. Whether financing projects needed to counteract climate change, to respond to it, or to create new services, banks have an opportunity to profit from increased participation in the climate change arena.

The changes in banking practices that Boston Common suggests could help spur environmentally friendly investments, create new lending opportunities for banks, lead to proper loan pricing, and help investors more fully understand the capabilities and interests of banks. We are hoping our friends at Boston Common can hear the applause coming from First Affirmative in Colorado!

 

At First Affirmative, we understand that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: August 5, 2014