Do environmental and climate scores for financial institutions reflect lending and underwriting activity? A case study of global banks

Abstract

Achieving international climate targets may require more than $8 trillion in annual investments to 2030. We investigate the extent to which third-party environmental scores for banks reflect lending and underwriting in fossil-fuel and low-carbon industries, and how ratings are influenced by outward signals of commitment to climate action. We provide empirical evidence on the performance of leading Environmental, Social and Governance (ESG) ratings providers and offer actionable guidance as to how ESG ratings may be improved in this context. We find that banks' environmental scores are most strongly influenced by signals of future intention regarding climate action, rather than by prior and current lending and underwriting behaviour. Our analysis highlights the need for rating providers, when constructing environmental scores for banks, to place more weight on key capital allocation decisions, and less on future intentions. We recommend that banks disclose breakdowns of their financing activities in key carbon-intensive and low-carbon industries.