Citi warns of ‘meaningful’ increase in loan losses on carbon tax

Citigroup found that the rapid enactment of a carbon tax would likely lead to a significant increase in losses on loans the bank has made to certain oil and gas companies.

In one scenario the lender modeled, which applied a $50 tax to every ton of carbon dioxide produced by exploration and production companies over a three-year period, Citigroup saw a “meaningful but manageable increase in expected loss,” according to a report released Thursday.

“It’s an interesting exercise to test a client portfolio in a rapid-onset carbon price scheme and understand what happens and what clients are resilient and what the ingredients for resiliency are,” Val Smith, Citigroup’s chief sustainability officer, said in an interview.

Citigroup published the report — the second of its kind — as part of the firm’s commitment to implementing a series of recommendations made by the Task Force on Climate-related Financial Disclosures. For the report’s latest iteration, shareholders asked the lender to assess more near-term climate risks Citigroup’s clients might face, Smith said.

Throughout the report, the lender distinguished between transition risks — those related to the economy’s transition to using less carbon, such as new climate policies or technologies — and physical risks, including those produced by the physical impacts of climate change, like rising sea levels or extreme weather events.

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In assessing its portfolio, Citigroup found that it lends to 25 industries that face a high level of either transition risk or physical risk.

“It was important to publish this information so that our investors and other stakeholders can really start to understand where we have exposure, and how much of it is higher climate risk,” Smith said. “That gives information about where we will be focusing.”

Wall Street is facing increased calls to better measure and address the impacts their lending has on climate change. Citigroup, one of the biggest lenders to energy companies, said earlier this year it will measure and disclose emissions tied to its lending portfolio and is working to finance $250 billion of sustainable activities by 2025.

Citigroup has already started lobbying President-elect Joe Biden and Congress to enact “ambitious” climate change solutions, CEO Michael Corbat said in Thursday’s report.

“We understand that climate change is an increasingly important issue to our regulators, investors and clients,” Corbat said. “We know much remains to be done — and quickly.”

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