- Many “eco-friendly” practices enacted by companies, including large US banks, amount to little more than greenwashing, failing to provide a meaningful contribution to climate goals.
- Organisational targets misaligned with the Paris Agreement present a major barrier
- Increasing carbon taxes could be an effective strategy to achieve climate goals
The climate crisis is no longer a distant threat but an urgent reality reshaping lives and ecosystems worldwide. With every passing moment, the need for decisive action grows more critical to secure a sustainable future for our planet.
But action becomes an increasingly difficult prospect when companies, and those that lead them, are not motivated to step up. A recent article in the Financial Times highlighted that a number of high profile global companies have begun to quietly drop their commitment to climate goals when it comes to structuring executive remuneration.
According to the article, leading banks such as UBS, Standard Chartered and HSBC have all stepped back on their climate commitments by decreasing – or removing entirely – how ESG goals and efforts are reflected in the pay and rewards of senior figures.
So if leaders are not being driven by personal gain to put a greener foot forward, what else can be used to motivate them? After all, we know that going green, for many organisations, does not come cheap. Transitioning to sustainable practices often comes with significant upfront costs that many companies, and even governments, find challenging to justify, especially when short-term economic pressures dominate decision-making.
For businesses, the prospect of abandoning profitable but polluting industries can seem risky, while governments, particularly in developing economies, may struggle to prioritise green initiatives over immediate social and economic needs. As a result, the financial viability of the transition remains a sticking point, slowing progress when urgent action is needed.
The introduction by governments of subsidies and tax incentives to support renewable energy projects, and the growing accessibility of technological innovations such as cheaper solar panels and energy-efficient equipment is helping to reduce costs and make sustainable practices more accessible, but despite these positive shifts, some companies continue to exploit loopholes or engage in greenwashing, or even greenshifting tactics to appear environmentally responsible and meet regulatory requirements, without making meaningful changes.
In fact, research by Frankfurt School of Finance and Management shows that US banks specifically, are not reducing their loans to high-emitting companies, despite the need to do so.
Instead of reducing the amount of loans to high-emitters, banks are instead just increasing the amount of loans they give to lower-emitters, in an attempt to rebalance the emissions in their whole portfolio – an act of greenwashing given there is no actual reduction in the emissions of loanee firms.
Measuring US banks climate risk
The study, conducted by Professor Dr Sascha Steffen of Frankfurt School of Finance and Management, alongside colleagues from University of Zurich, and Swiss Finance Institute introduces a new measure of exposure called Climate Transition Risk Exposure (CTRE), which assesses the carbon footprint of borrowers at 34 major U.S. banks.
The researchers found that U.S. banks are increasingly exposed to climate transition risks, particularly through the carbon footprints of their syndicated loan portfolios.
For instance, Silicon Valley Bank has the lowest CTRE score due to its focus on venture capital and tech startups, which tend to generate fewer emissions. Banks face climate risks when lending to companies vulnerable to physical or transition risks-physical risks related to climate shocks and transition risks arising from regulatory changes or climate-related litigation. These risks can increase the likelihood of borrower defaults, impacting bank portfolios.
The study also finds that after the Paris Agreement in 2015, average climate transition risks declined, mainly due to banks shifting their loan portfolios toward low-emission borrowers.
However, the reduction wasn’t due to decreasing loans to high-emission firms. Banks with higher transition risks tend to disclose less about climate impacts, often only responding to analysts’ queries during earnings calls. Notably, banks with more female board members had lower exposure to transition risks, highlighting the positive link between gender diversity and environmental performance.
“The study highlights the challenges banks face in managing climate transition risks, which are complex to identify, price, and hedge,” says Professor Dr Sascha Steffen. “This is due to the systematic nature of these risks, insufficient firm disclosures, and a lack of hedging instruments. As central banks incorporate climate change into their regular stress tests, the evolving regulatory environment increases scrutiny on banks’ reported exposures to climate risks.”
Greenwashing isn’t the only issue – company’s goals are not aligned
A recent study by Imperial College Business School, reveals that many publicly traded companies in high-emitting sectors are simply not aligning their emissions pathways with the targets set by the Paris Agreement – clearly corporate behaviour needs to change if we are to effectively contribute to global sustainability efforts.
The study analysed over 800,000 sustainability initiatives across 9,000 companies over the last 20 years, using a comprehensive database of corporate sustainability reports. By focusing on 1,900 companies in high-emitting sectors such as energy, industrials, materials, and utilities, the researchers found that the key differentiator between successful and unsuccessful companies was their sustainability behaviour.
Companies that were able to align their emissions pathways with the Paris Agreement tended to invest more in innovative solutions and renewable energy resources. In contrast, companies that were misaligned with the Paris targets primarily focused on risk-mitigating actions, such as modifying existing assets and processes, rather than developing new technologies or transitioning to cleaner energy sources.
Dr. Simone Cenci, one of the authors of the study, pointed out that the lack of clear reporting standards has made it difficult to track and assess corporate sustainability efforts in enough detail. This has contributed to the failure to identify effective actions that can reduce emissions.
To address these challenges, the researchers developed a framework that tracks the effectiveness of corporate sustainability actions. This framework provides transparency across sectors and countries, offering businesses a detailed understanding of sustainability behaviours in their industry. It also helps investors make better decisions about sustainable capital allocation and enables policymakers to design more effective climate policies.
For those looking to introduce more effective sustainability strategies into their organisations, Imperial has also been diligent in ensuring that is training available for executives through its suite of Executive Education programmes.
Are there other effective ways to incentivise the transition?
A study by researchers from WU (Vienna University of Economics and Business), FAU Erlangen-Nürnberg, and UAS Grisons explores the most efficient strategies for reducing CO2 emissions for companies.
The study finds that increasing carbon certificate prices is far more effective than subsidising renewable energy like wind and solar power. While the EU aims to cut greenhouse gas emissions by 55% by 2030 and achieve climate neutrality by 2050, many countries primarily rely on renewable subsidies. However, low carbon prices (below €10 per ton) have been insufficient in driving significant emission reductions.
The researchers compared the approaches of Germany and the UK, with Germany focusing on renewable subsidies and the UK implementing a carbon tax that raised carbon prices above €35 per ton.
Their analysis revealed that the UK achieved a 55% reduction in emissions from power generation since 2013, while Germany saw only modest reductions. The key difference lies in the UK’s carbon tax, which made coal less economically viable, leading to a shift toward natural gas, which produces half the carbon emissions of coal.
Conversely, Germany’s subsidies failed to phase out coal until very high levels of renewable energy were reached.
The study also calculated the cost-effectiveness of various policies, showing that carbon pricing achieves significantly greater emissions reductions for the same financial investment compared to subsidies for renewables. The researchers argue that carbon pricing offers a market-driven solution that efficiently accelerates the transition to cleaner energy sources.
To meet critical climate goals, greater incentives are needed to encourage the transition to sustainable practices, particularly in high-emission industries. Making sustainability financially viable is essential, as without clear economic benefits, companies and governments may struggle to take the necessary steps toward a low-carbon future.
By, Peter Remon
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