COP29: Climate strategies for banks – best practices

At COP29 in Baku, Azerbaijan, the Nordic Investment Bank (NIB) hosted a panel debate on how climate strategies are changing banking operations and client relationships. The session, held on the Finance Day at the Nordic Pavilion, featured experts from the Central Bank of Iceland, Citibank, and NIB discussing examples of climate strategy implementations.

Banks generally have a central role in addressing climate change. According to consultancy firm McKinsey, the global banking sector intermediated about USD 400 trillion in 2023. Banks manage various types of risk, and increasingly climate risk. As banks interact with clients across diverse sectors, they can influence change by supporting their clients in taking climate actions.

“When looking at banks at the very basics, what we do is three things,” said Luca de Lorenzo, Head of Sustainability at NIB. “Firstly, we move a lot of money around and allocate capital across the economy. Secondly, we manage risk, such as market risk, credit risk, regulatory risks, and increasingly climate risk. And thirdly, we interface with a variety  of clients in many different sectors, and ultimately, it’s them, really, that should change and drive the change.”

Central Bank of Iceland’s threefold pledge

In 2021, the Central Bank of Iceland joined the Network for Greening the Financial System (NGFS), which is a network of central banks and financial supervisors. The bank made three pledges; to reduce operational emissions, to map the climate risks facing financial institutions and the economy, and to support an orderly transition to a green economy.

“We are now preparing a climate scenario analysis or a stress test to look at the corporate lending portfolios of the commercial banks to see what kind of emissions they are financing,” said Tinna Hallgrímsdóttir, Climate Risk and Sustainability Specialist at the Central Bank of Iceland in Reykjavik.

As the Financial Supervision Authority is a part of the Central Bank of Iceland, they are now incorporating climate risk into its supervisory activities. The next step is to include also pension funds and insurers.

“We have to make sure that regulated entities are complying with all these new big ecosystems of sustainable finance regulations,” Hallgrímsdóttir said.

Citibank’s focus on data and capacity building

Nasser Malik, Managing Director, Corporate Bank Head, Sustainability and Corporate Transitions, at Citi in New York, said their climate strategy is focused on risk management, opportunities in financing the transition, and systemic contribution.

“The path to success is dependent on several fundamental things. Number one is, do you actually understand the carbon footprint that you finance? So understanding data is the first big step in executing, because if you can’t measure it, you can’t manage it.”

“You’re talking about a lot of functions within a bank, whether it’s a first-line banker or a second-line risk officer, people that are in different compliance functions—do they understand the dynamics of what we’re trying to solve? I mean, do they even understand scope one, scope two, scope three.”

“So education and capacity building become a huge undertaking and actually an opportunity, so that at a deeper level, the people that ultimately execute and implement these strategies know what the underpinnings to get to where they need to be are,” said Malik.

“We have set up a dedicated banking, investment banking, and corporate banking team just to focus on clean energy… so that we can contribute from a financing perspective in driving the transition.”

NIB’s sector-specific targets

Luca de Lorenzo shared NIB’s climate strategy setting sector-specific, science-based targets that align with the Paris Agreement, reducing greenhouse gas emissions through its financing activities and operations.

De Lorenzo mentioned that in hard-to-abate sectors like cement, steel, and aluminium, NIB has very clear science pathways which we would like our clients to follow. He also discussed stress testing of NIB’s portfolio.

“We’ve started some stress testing on our portfolio, our balance sheet, because ultimately that’s the emissions that we hold.”

Implementation and client engagement

The discussion turned to how these strategies are being implemented and their impact on operations and client relationships.

Malik stressed the need to understand clients’ strategies and constraints. “The first thing we need to do is really understand their strategy. But equally, what are their constraints, and where do they see the bottlenecks?”

Using the aviation sector as an example, he explained the complexities involved.

“There’s a lot of talk about SAF—sustainable aviation fuel—and sustainable aviation fuel certainly will be part of the solutions to decarbonising the aviation sector. But if you look at the 1.5-degree pathways, the contribution of SAF to decarbonisation doesn’t actually kick in materially until about 2030,” Malik said.

De Lorenzo agreed on the need to engage with hard-to-abate sectors, even if it initially increases financed emissions.

“We know that if we engage with them today, we will actually increase our financed emissions on our balance sheet, initially. But the idea is that we engage exactly to bring them down,” he said, adding that “we like to say we get our hands dirty to wash them”.

Hallgrímsdóttir emphasised the importance of clear transition plans when financing hard-to-abate projects.

“We need to be really clear on the transparency of the transition plans in place… because we can’t afford to have failed transition plans now.”

Regional nuances in implementation

Malik highlighted differences across geographies.

“The climate strategy is one; the nuance on countries and geography is very material,” he said.

He pointed out that in many Global South countries, “resources are very constrained,” affecting how climate strategies are implemented.”

“You obviously have all the key countries in the EU where their regulation… are definitely having an effect in moving the needle,” Malik observed.

Hallgrímsdóttir said that in Iceland, there is a perception of banks being environmentally friendly, which can lead to complacency.

“I think the banking system as well as the general public has kind of a blind spot for the climate risks that we might face,” she said. She highlighted the significance of transboundary climate risks.

“Disruptions of supply chains—pharmaceuticals, critical minerals, foods, anything—that could basically have the biggest impact, and that’s where we’re not doing the research, and that’s where the blind spots are.”

NIB participated as an observer in the 29th session of the Conference of Parties (COP29) in Baku, Azerbaijan under the United Nations Framework Convention on Climate Change (UNFCCC). For a recording of this debate at 10:00-10:45 on 14 November, please visit here, in partnership with the Nordic Council of Ministers.