The Climate Custodians

The basis for this post is a new Harvard Business School Working Paper1 that expands on the idea of the climate custodians within the unique governance context of the Statement of Significant Audiences and Materiality for subsidiaries of large bank holding companies. Focusing on the Big Three global custody banks — State Street, BNY Mellon, and JPMorgan Chase — we make the case for large custody banks assuming the role of climate custodians for corporations and institutions.

Custody banks provide settlement, safekeeping, and reporting of customers’ marketable securities and cash, enabling liquid securities markets. These banks have no trading decision rights over their customers’ assets, and take direction from clients, regulators, and other claimants. In Q3 2015, three banks — State Street, BNY Mellon, and JPMorgan Chase — held $75.5 trillion in custody assets, which represent nearly two-thirds of tradeable global assets. These Big Three global custody banks are systemically important to the liquidity and safekeeping of the global economy. Both the banks and their largest clients and counterparties (asset managers, pension funds, other non-custody banks, securities trading entities, and large asset owners) are highly regulated.

There is growing recognition by major players in the global political and financial systems — such as The Financial Stability Board’s industry-led disclosure task force on climate-related financial risks, the two big U.S. pension funds of CalPERS and CALSTRS, the “Portfolio Decarbonization Coalition” assembled by the Swedish pension fund AP4 and French asset manager Amundi with committed assets of $600 billion, and the Ceres’ Investor Network on Climate Risk with $13 trillion in assets — that reversing the trend in climate change is key to the long-term survival of mankind. There is also a growing conversation about the role large corporations can play in addressing the perils of climate change and how institutional investors and regulators can support these efforts. We believe that global custody banks are key players that have been missing from the conversation.

Their absence from the narrative isn’t surprising, since few outside the financial industry have heard of custody banks or know what they do.