Banks Generating Revenue Growth From ESG Strategies

Whether it’s to stay ahead of proposed regulatory mandates or to attract customers and employees, 'going green' can be a plus for banks and credit unions. Though 'sustainability' is supported in concept by nearly all bankers, in action it can bring a variety of high-profile risks — but so can no action.

Environmental, social, and governance (ESG) issues are top-of-mind for financial institution executives. A whopping 98% of U.S. banking executives in fact said they view sustainability as an important part of their business strategy, according to a study by Mobiquity.

Saying you support sustainability — while not risk-free — is not likely to land a banking CEO in the headlines. Actions to support the concept, however, can and have had that effect. Even so, numerous financial institutions, for whatever reasons, want to contribute to “ensuring a balance between economic growth, environmental care and social well-being,” to borrow a description of sustainability from Banco Santander.

But what role can banks and credit unions play in addressing sustainability, especially the politically charged issue of climate change? Actually, quite a bit. And there could be some good results from doing so.

For example, banks and credit unions can use their support of sustainability to attract and retain both customers and employees. 80% of consumers and 84% of employees are more likely to buy from or work for a company that is seen as actively supporting the environment, a 2021 PwC survey found.

Critical to Many:

80% of consumers say they are more likely to buy from a company that supports environmental causes.

For financial institutions that elect to “go green,” the process isn’t easy since measuring environmental impacts can be vague. Nor can sustainability be addressed by a few paragraphs in an annual report. “Sustainability efforts do not work in a vacuum; they must permeate the entire organization and that can only happen if they’re being driven from the top,” explains Kate Drew, Director of Research at CCG Catalyst.

As an added reason to focus on climate issues, it’s likely that bank regulatory bodies will enact mandates for environmental sustainability. For example, the SEC has proposed climate change disclosure rules and the FDIC put out for comment a statement of principles for climate-related risk management for large financial institutions. Whether these efforts become actual regs remains to be seen, given that the climate change issue is so highly politicized.

To Get Started in Sustainable Finance, Define the Scope

The biggest challenge for banks and credit unions wishing to take concrete steps is figuring out which environmental impacts they should measure. Financial institutions can look for guidance to the Greenhouse Gas Protocol, a framework for measuring and managing carbon emissions.

The protocol provides standards to measure three categories of emissions:

  • Scope 1: Emissions that come directly from sources owned or controlled by a financial institution.
  • Scope 2: Emissions from purchased electricity a financial institution consumes.
  • Scope 3: Indirect emissions that are a consequence of a financial institutions’ actions, such as financing fossil fuel companies.

Scope 1 and Scope 2 emissions are pretty straightforward (although time-consuming) to measure. According to a CCG Catalyst report, determining your carbon footprint requires collating data around energy consumption to run the business, such as energy used by branches or from company vehicles. Next is to translate consumption into generated carbon emissions.

Read More: Green Loans: A Fast-Track Method to Be a Banking ESG Leader

Once you measure, the next hurdle is deciding what to do. CCG Catalyst suggests buying renewable power, insulating branches, and purchasing carbon offsets such as investing in reforestation projects or financing renewable energy projects or companies.

Bank vendors are increasingly offering more green products. IBM, for example, claims that its LinuxONE Emperor 4 servers can reduce clients’ energy consumption by 75%, space by 50% and CO2 emissions by over 850 metric tons annually.

Shifting more computing to the cloud is another way banks can reduce Scope 1 emissions, but in reality it merely moves the energy consumption to another company and location. The net effect to the environment is unchanged.

Just Part Of Business:

Almost all (98%) of banking executives say that sustainability is an important part of their business strategy.

Scope 3 emissions are more challenging to measure since they require calculating what portion of a clients’ emissions are attributable to bank financing. However, proponents argue Scope 3 can have the biggest impact on climate change.

The world’s biggest 60 banks — 13 of which are in the U.S. — have provided $460 trillion in financing for fossil fuel companies since the Paris climate deal in 2015, according to the Banking on Climate Chaos: Fossil Fuel Finance Report 2022 produced by Rainforest Action Network, Sierra Club, and five other environmental groups.

As a result of such data, large banks have increasingly been targeted by climate change activists. Some have backed away from lending to fossil fuel industries. But that too brings consequences as addressed further on.

Read More: Electric Vehicle Lending: How Green Loans Can Accelerate Growth

The Business Case for Sustainable Finance

According to the Corporate Knights, banks have a valuable role to fill as conduits of investment capital to finance “decarbonization.” The online publication notes that “if the world’s ambitious decarbonization targets are to be met, the scale and of pace of sustainable financing activity will need to increase considerably.”

Corporate Knights, in partnership with The Banker, ranks financial institutions based on their income from sustainable financing activities as a percentage of total revenues. Vancity, a credit union in Vancouver, tops the 2022 rankings. U.S.-based Amalgamated Bank ranked third. The only other U.S.-based institution to crack the top ten was Citi.

Top 10 banks by revenues earned from sustainable lending and investments

Source: Corporate Knights/The Banker

Learn More: Is Eco-Friendly ‘Green Banking’ a Sustainable Strategy?

Financial Institutions Embracing Green Banking

Some banks aren’t waiting for a regulatory mandate and have taken action to combat climate change on their own initiative.

Amalgamated Bank’s website is filled with images of nature, and the $7.7 billion bank prominently highlights its actions in “climate justice.” In 2016, Amalgamated Bank committed to aligning business and operations with The Paris Agreement.

The New York City bank is also a founding member of the United Nations-backed Net-Zero Banking Alliance (NZBA) and began disclosing Scope 1 and 2 in 2017 and Scope 3 in 2019.

Amalgamated no longer lends to fossil fuel companies and 32% of its loans now go to companies promoting climate solutions — most of that related to solar power. The financial benefits for the bank, according to Ivan Frishberg, Chief Sustainability Officer, include increased credit quality and success from new product lines.

“The real test,” says Frishberg, “is not just about the amount of capital [financial institutions] are directing towards clean activities, but also the transition away from financing for fossil fuels. I think for some institutions, those high-carbon activities have proven to be quite sticky on balance sheets.”

A Point for Profit:

Going green isn't just an incentive for attracting and retaining customers. It can turn out to be a strong and reliable revenue stream for financial institutions.

Virginia-based Blue Ridge Bank joined the Net-Zero Banking Alliance in 2021 and is focused on building out its climate strategy. The bank’s ultimate goal is to achieve net zero by 2040 — a full decade earlier than the 2050 goal of the NZBA — as well as to stay ahead of regulatory changes or policies, says Steve Farbstein, Senior Vice President, Chief Revenue and Development Officer.

Reflecting its name, Climate First Bank is built around environmental sustainability. The Florida institution, opened its doors in 2021. On its website, the bank states that it is committed to helping customers achieve their financial goals while saving the planet one transaction at a time. The bank is also a member of NZBA.

Dig Deeper: How One Florida Bank Is Embracing the Green Banking Agenda

Climate First offers specialty loan products for solar panel arrays, energy improvements, sustainably certified construction, and EV charging station installation.

Going Green in Banking Is Not Without Risk

In today’s polarized and politically overheated world, there is risk in just about every decision a bank executive makes. For every person who wants companies to take a stand on an issue — climate change, gun control, abortion and many others — there will be someone else who boycotts them for taking that stand.

Specifically relating to sustainable finance policies, Texas and West Virginia have already barred several large financial institutions — including (in the case of West Virginia) JPMorgan Chase, Wells Fargo and Goldman Sachs — from obtaining any new state business contracts as a result of the lenders’ decision to cut back on lending to coal, oil and gas companies.

Several other states including Florida and Tennessee plan to introduce (or have introduced) legislation allowing the states to take similar measures against bank decisions regarding fossil fuel lending.

The larger the institution, the larger the target on its back — and front. There’s no hiding. At least there are opportunities, as the above comments show, as well as pitfalls. Ultimately a CEO and board have to weigh the options and the available facts and make a decision.

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