ESG Engagement with Unicredit
Barney Timson explains how we recently engaged with UniCredit, an Italian listed, pan-European commercial bank (held within our CFP Castlefield Sustainable European fund), to better understand how it is using its influence to encourage the transition towards net zero and stop facilitating the expansion of fossil fuels.
Banks are in a unique position in that they can wield a significant amount of influence by leveraging their corporate loan books and either refusing loans outright for specific sectors or placing conditions on loans that will create some form of sustainability or societal improvement.
According to Banking on Climate Chaos, an annual ranking of banks and their levels of fossil fuel financing, UniCredit has much lower exposure than many of its peers.
Nevertheless, we engage regularly with the company to encourage it to continue tightening its policies and further limit lending to the oil, gas and coal sectors.
In addition, as a pan-European bank, UniCredit has operations in Russia, therefore we also wanted to understand better how the situation was being managed given the imposition of country-wide sanctions, and receive an update on future plans relating to the subsidiary.
According to Banking on Climate Chaos, an annual ranking of banks and their levels of fossil fuel financing, UniCredit has much lower exposure than many of its peers.
We spoke with the dedicated ESG investor relations team who began by explaining that it has set targets for high emission sectors including oil & gas, power generation, automotive, steel, and has a policy in place for the phasing out of coal by 2028.
Separately, the team also indicated that targets will be in place for both shipping and real estate in due course.
The team also highlighted that it has set KPIs for ESG Lending, with 13% of medium to long-term notes now environmentally, socially or sustainability linked. Separately, 48% of Investment Products are classified as article 8 or article 9 sustainable investments. Turning to bonds, 18% of all bonds issued are classified as sustainable.
For each of these categories, current performance is tracked against targets for 2024. UniCredit has also published its first Natural Capital and Biodiversity statement, highlighting its progress so far and setting out its ambitions for the future.
The conversation then turned to fossil fuel financing. UniCredit operates a client classification system, which places clients in different 'buckets' depending on the percentage of revenues generated from unconventional oil & gas, arctic oil & gas and coal.
The services which a client can receive from UniCredit depend on the bucket they are placed into, with the worst offenders unable to receive even basic banking services. This approach is utilised to encourage high emitters to move through the categories and reduce their carbon footprint. The current framework will evolve over time with thresholds tightened and additional scope added.
We also discussed the topic of facilitating fossil fuel expansion, and how the most recent Banking on Climate Chaos report had UniCredit listed as one of the largest investors into the Arctic.
The team refuted those numbers arguing that they could not reconcile many of the figures published by NGOs and that often deals were over-stated. We argued that in these situations, being more transparent and publishing the data themselves would help to resolve future issues, which was a point they took on board.
Finally, we touched upon the topic of Russia, where through its subsidiaries, UniCredit does have some operations. The overarching strategy is to manage down the assets as quickly as possible, however, due to the sanctions placed upon Russia, any potential sale requires approval from both the Kremlin and the ECB, which makes things far more complicated.
There are still 3100 employees working in Russia, and from a social and employee wellbeing perspective, rather than totally cut off contact, they remain in touch.
Finally, we touched upon the topic of Russia, where through its subsidiaries, UniCredit does have some operations.
As interest rates have risen, and currencies have fluctuated, Russian operations have become more profitable, however it is worth noting that these are more technical reasons, and not an active strategic decision taken by management. Separately, despite deposits still being paid in, the loan book is shrinking, indicating that operations are winding down.
Overall we believe our call with UniCredit was encouraging, and we are pleased to see that a large pan-European bank is open to engagement across a variety of ESG topics. We do see room for improvement in certain areas, however, simply taking the time to listen to shareholder concerns is a positive sign. We will continue to monitor and engage.
Written by Barney Timson