The world's banks have a role to play in stopping climate change. Here is what they must do.
Greta Thunberg put it straight. "If we can save the banks, we can save the world," she said at an event in New York hosted by The Intercept. The Swedish activist has repeatedly criticized the financial system and called on banks to stop financing fossil fuels. And she is right about one thing: "Change is possible." And more than that — this change and transition to a more sustainable banking system is already happening.
Sustainable finance and ESG (environmental, social, and governance) factors have entered the mainstream. The largest global banks, such as JPMorgan Chase and Bank of America, are allocating trillions of dollars to invest in clean technology and sustainable development. Most major corporations are setting sustainability goals and monitoring their carbon footprint. Some have committed to reducing their emissions or even achieving net zero by 2050.
The rise of green banking — the reasons
Why is this happening now? The two key drivers are increasing pressure from global institutions and policymakers, and growing climate awareness among customers.
In November 2021, during the 26th United Nations Climate Change Conference (COP26), heads of state and climate experts agreed on actions needed to combat climate change. One of the conclusions of COP26 was that there is a clear overlap between finance, sustainability, and technology, and that green fintech or green finance will therefore play an important role in achieving environmental sustainability.
The European Commission’s Corporate Sustainability Reporting directive has required banks and insurance companies to disclose more information about how they operate and deal with environmental change. The European Banking Authority has been tasked with producing a report outlining the content of these ESG disclosures and issuing guidance on the subject.
While regulatory pressure is important, even more important is "the Greta effect." The Millennial and Gen Z generations are really concerned about climate change and expect companies to articulate a sense of purpose that goes beyond profitability. People want business to be greener.
According to a global sustainability report from Nielsen, 66% of people worldwide are willing to pay more for goods and services if they come from sustainable companies. That number rises to 73% among Millennials.
This data should not be ignored, especially because it is Millennials who often run fintech startups. They themselves, apart from being profit-driven, are often mission-driven and are naturally adopting ESG into their business plans. Research from MarketingDrive shows that Millenials and Gen Z investors are "three times more likely to believe that companies must serve the community and society." Consequently, sustainability is becoming part of the fintech equation.
How banks and fintechs are “going green”
Fintechs are not the only ones aware of the need to address climate change. A 2020 report from EY found that 52% of banks see both climate change and environmental issues as emerging risks in the next five years, up from 37% in 2019. Many financial institutions are indeed "going green" and incorporating ESG criteria into their policies to reduce their environmental impact. Let us look at some more concrete examples.
1. Making business carbon neutral
In 2021, a group of 43 international banks, including Barclays, HSBC, Bank of America, Deutsche Bank, and BNP Paribas, committed to reaching net zero greenhouse gas emissions by 2050 or earlier. Some of these heavyweights are already there.
Bank of America, for example, achieved carbon neutrality for Scope 1 and 2 emissions in 2019. How? Since 2010, the bank has reduced its energy consumption by 45% and switched to renewable electricity. In addition, the bank actively supports global environmental conservation efforts by purchasing high-impact carbon offsets.
While it's not as easy for a company to become carbon neutral, it's also not as overly expensive. Caitlin Drown of the nonprofit sustainability group Climate Neutral, quoted by The Economist, said that on average it costs about 0.4% of annual revenue to offset a company's total carbon footprint.
The process of moving to carbon neutrality can help banks better understand their supply chains and provide additional value to their customers who, given the choice, may prefer a carbon neutral bank.
According to a survey by Deloitte, 90% of companies view energy procurement "not simply as a cost to the business, but as an opportunity to reduce risk, improve resilience and create new value."
2. Limiting exposure to carbon-heavy industries
Despite the promise to achieve net-zero greenhouse gas emissions by 2050, most banks are still financing the fossil fuel industry. A recent reportby a coalition of non-governmental organizations shows that the world's 60 largest banks have provided $3.8 trillion in financing to fossil fuel companies since the Paris climate agreement in 2015. JPMorgan Chase tops the list of banks financing fossil fuel projects between 2016 and 2020.
Is there a way out? Lending is still in the nascent stages of its green transition and there’s a long road towards decarbonizing the industry. What leading lenders can do is to price the borrower's complete carbon footprint, putting pressure on the biggest CO2 emitters. Such costs would make carbon-emitting projects more expensive and some lenders may wish to avoid high-carbon-risk projects altogether.
For example, the Industrial and Commercial Bank of China, China's largest bank, recently abandoned a plan to finance a $3 billion coal-fired power plant in Zimbabwe, citing "environmental concerns."
Chinese lenders were already seen as a last resort to secure financing for coal-fired power plants in the region, as South African and European banks have come under increasing pressure from their shareholders not to finance such projects.
Another example is BNP Paribas, that since 2011 has tightened investment criteria for carbon-intensive industries. The bank has not financed a new coal-fired power plant project since 2017 and promises not to work with new clients if their carbon-related activity generates more than 25% of their income.
3. Preference for more sustainable vendors
The number of investors, lenders, and asset managers requiring providers to measure their ESG performance has grown rapidly in recent years, and ESG investing has evolved from socially responsible investment philosophies into its own form of responsible investing.
For example, Bank of America, which I discussed in point 1, aims to ensure that 70% of its global suppliers set targets for reducing greenhouse gas emissions or renewable energy, and it will screen 90% of global suppliers for ESG risks after spending.
Banks can now give preference to more sustainable suppliers and companies that have, for example, the B Corporation™ certificate, of which Netguru is a proud holder.
The certificate is awarded to organizations whose business activities have a proven positive impact on society and the environment.
The benefits of the certification include access to best practices in various industries that help eliminate waste and operational inefficiencies in areas such as energy and water consumption. “It’s easier to build effective partnerships with purpose-driven clients,” says Karolina Długosz, Sustainability Lead at Netguru. “Maintaining a B Corp Certification can greatly reduce the process of supplier verification in the sustainability area,” she adds.
Another way banks can reduce their environmental impact is by weeding out poor environmental practices in their supplier networks. However, there's a catch: there is still no universal standard for sustainability reporting, and it's difficult to establish comparable benchmarks within an industry or across industries. This gap can be bridged by technology: AI and analytics solutions that provide data on environmental policies and sustainable supply chains. Advanced data analytics can help calibrate supplier efficiency and bring transparency across the supply chain.
4. Making retail banking rewarding to environmentally-friendly consumers
As consumers become more environmentally conscious, they are willing to pay more for sustainable consumer brands and services. Some are choosing to pull their money away from the big banks and turn to fintechs and neobanks like Tomorrow Bank, Bunq, and Aspiration.
Tomorrow Bank, for example, promises consumers that they will invest their money sustainably and uses smart technologies. Bunq lets consumers choose how they invest their money and has already planted over four million trees. Aspiration offers up to 10% cash back on Conscience Coalition purchasesand 100% fossil-fuel-free investment and retirement funds.
Even established banks and card issuers can make their offerings greener. Visa launched its first $500 million green bond in 2020. Moody's raised its forecast for sustainable bond issuance from $350 in 2020 to a huge $850 in 2021, an increase of nearly 150% year-over-year. Mastercard has unveiled a Carbon Calculator for banks around the world. It enables banks to provide their customers with carbon footprint data and insights to help them manage their consumer spending and provide opportunities to contribute to reforestation.
There are also other technological solutions that allow the carbon footprint of financial transactions to be calculated. Stripe Climate allows businesses to invest a portion of their revenue in expanding new carbon reduction technologies, and Klarna has launched a new feature for its 90 million customers: CO2 insights based on Doconomy's Åland Index.
5. ESG investing for wealth management
ESG investing is increasingly finding its way into mainstream investment strategies. More and more banks are building a portfolio of "green projects." Goldman Sachs, for instance, is committing to invest $750 billion in sustainable finance by 2030 while Citigroup has committed to invest $1 trillion, and Bank of America has pledged $300 billion in sustainable investments.
Data shows that ESG-related funds outperformed the markets in the first quarter of 2020. That year, investors put $20.6 billion into funds focused on ESG issues, nearly quadrupling the previous year's record, according to Morningstar data.
In the US, funds managed with sustainable investment strategies now account for more than a quarter of total assets under management, according to the Global Sustainable Investment Alliance.
Many commercial bank customers can now choose from a variety of ESG-linked funds, bonds, and assets. According to energy research group Bloomberg NEF, bonds and loans raised for environmental and social purposes rose 29% to $732.1 billion in 2020.
6. Supporting ESG initiatives within CSR policies
In recent years, the adoption of a corporate social responsibility (CSR) policy has become a significant factor in a company's brand reputation and investment value. Because ESG provides quantifiable data on the company's use of natural resources, conflict minerals, social composition, and impact, CSR and ESG policies should be aligned. While CSR is often a way to demonstrate the sustainable impact of a bank's initiatives, ESG provides more tangible and quantifiable metrics on these activities.
An example of such a unified approach is Citi Handlowy Bank's Kronenberg Foundation. The foundation helps the bank pursue its social mission and sustainability efforts. BNP Paribas also links its CSR and ESG efforts under a common "green policy." The bank participates in tree planting and reforestation initiatives and provides consumers with carbon and nitrogen footprint calculators.
7. Consistency in actions
Last but not least, consistent action is necessary to avoid accusations of greenwashing. One example of such accusations is JPMorgan Chase. The bank has committed to meeting the goals of the Paris Agreement and providing $200 billion in clean, sustainable financing by 2025, but at the same time it tops the list of banks financing fossil fuel projects.
Another case: in 2018, about 30 activists gathered for a demonstration in Brussels to protest against "greenwashing" by ING. They accused the bank of violating a sustainable development model and investing in palm oil in several countries, including Sierra Leone.
Last year, Aspiration — one of the "green banks" backed by celebrities such as Robert Downey Jr, Drake, Leonardo DiCaprio, and Orlando Bloom — also proved not to be as sustainable as it claimed, according to a Propublica investigation. Aspiration's marketing claim about "35 million trees planted" turned out to be the cumulative total of trees to be planted. The bank admitted in correspondence with Propublica that the actual figure was 12 million.
ESG strategies are no longer just an "add-on" to banking. Environmental policies are embedded in the core of banking operations and represent a key assessment market for conscious consumers who are willing to pay more for a sustainable product or service.
But these are not the only customers who want their banks to become greener. The world's largest banks have a role to play in limiting greenhouse gas emissions, primarily by limiting financing for carbon-intensive industries and investing in green projects.
Finance is key to the massive economic transformation needed to move away from fossil fuels and achieve net-zero emissions. If we can transform the banks, we can save the world — or at least run the global economy without harming the climate.