European banks’ scope 3 estimates

In our latest sector study on the banking sector entitled “Navigating the energy transition period”, we elaborate on the sector and stocks’ likely behaviour should the planned transition happened.

Banks’ mounting climate risk issue

According to mainstream models, because of past procrastination, we have only 30 years left to reach carbon neutrality and limit global warming to an acceptable +2°C. Reaching carbon neutrality implies huge investments to fully decarbonise electricity and reduce the usage of fossil energy resources at a level commensurate carbon sequestration capability. Although one can be very sceptical about the ability/motivation of governments to impel such a painful move, market forces, driven by technological breakthroughs, could come to the rescue.

Although their direct carbon footprint is fairly limited, Banks will not be immune to the energy transition.

As sell-side analysts, we have tried to answer the two traditional questions, should the energy transition accelerate according to 2050 net-zero objectives:

• How would the sector perform relative to the rest of the market?
• What would be the winners and the losers within the sector?

Sector underweighting

In our view, the sector’s relative performance will continue to be driven by the evolution of the capital intensity and the macro-economic conditions.

We do not expect any change in capital intensity.

Climate stress tests will be implemented as soon as next year. In our view, they will show that the sector as a whole is properly capitalised.

We see the implementation of green/brown weighting factors as very unlikely. Even if it was the case, the regulator would make such an implementation capital neutral.

The macro-economic scenario remains an unknown. However, as shown in our report, banks are unlikely to outperform even in the best-case scenario. As a result, underweighting the sector is the best strategy in our view.

Winners and losers: bet on commercial real estate

In our view, the stock’s relative performance will be driven by potential stigmatisation and capital reallocation.

Although we expect a statu quo on capital requirements at a sector’s level, one cannot rule out overexposed banks to be stigmatised by the regulator (through reversible, phased out capital add-ons) or other stakeholders (through forced repositioning, valuation discount, etc). In that context, the long-awaited disclosure of financed emissions will likely prove pivotal. This is the reason why we propose our estimates for the bulk of our coverage universe.

The energy transition will require massive investments, translating into capital reallocation and consequently diverging performances within the sector. We tried to model the respective sensitivities of our coverage to green financing opportunities. Our exercise shows that browner is not necessarily better as the stronger the exposure to commercial real estate the better.