Nearly 60 years ago, the publication of Rachel Carson’s Silent Spring launched the environmental movement that has since transformed how people think, upending global policies and industry practices.
Banking has not been immune from the change — lender liability issues and green building standards being two early examples of the impact. But now, the rise of “sustainability” — the broader concept of ensuring that present environmental, economic and other practices don’t compromise future generations — has penetrated the banking industry, and all financial institutions are expected to keep up.
Yet many banks and credit unions don’t know where to start with sustainability. There’s not really a clear framework in place they can follow to be more “green,” beyond adopting green building standards.
We’re going to see more climate disclosure requirements. The train is coming. You would be well served to jump on board now.
— Ruchi Bhowmik, Ernst & Young
To dive into where the banking industry currently stands with environmental initiatives, technology company Mobiquity released its inaugural Global Benchmark for Sustainable Banking. The report surveyed 400 C-suite executives at a mix of challenger and traditional banks in the U.S., the U.K., Germany and the Netherlands.
High Awareness, Low Implementation
For the most part, Mobiquity found that executives recognize that sustainability is an important part of business strategy — 78% of those in the U.K. say that, along with 91% of Dutch executives, and just about all respondents in the U.S. (98%) agree with that premise.
Yet just because they acknowledge its relevance to the industry does not necessarily correlate with high prioritization. The report also found that over two thirds of U.S. C-suite bank leaders (68%) don’t view it as a “top concern at the board level” and even fewer (43%) are planning to start building sustainable initiatives as part of their of business strategies.
Ruby Walia, Senior Digital Banking Advisor for Mobiquity’s North America segment, was a banker for much of his career. He believes he can speak “with some authenticity around how people in banks feel about sustainability.”
For instance, while many executives value sustainability, the challenge lies in “converting that interest from something we are instinctively aligned with into actual initiatives at the board level,” Walia explains.
Financial Regulators and Agencies Weigh In
In May 2021, President Biden issued an executive order on Climate-Related Financial Risk that insists the Treasury must assess the various risks that climate change may have on the banking industry.
The New York Federal Reserve Bank is already building environmental measures into bank stress tests to measure their exposures to climate-related risks, which, according to Reuters, is a “possible early step toward assessing whether financial institutions have enough capital on hand to withstand them.”
In a New York Fed paper called Climate Stress Testing, the authors explain that banks not only have to concern themselves with the physical implications of climate change, but also its impact on loan portfolios.
The paper cites fossil fuels as a primary example, noting that financial institutions providing financing “to fossil fuel firms are expected to suffer when the default risk of their loan portfolios increases, as economies transition into a lower-carbon environment.”
While some Republican lawmakers have contested the validity of the central bank’s jurisdiction to enforce such risk assessment, Reuters writes, Fed Chairman Jerome Powell insists that “making sure banks are resilient to the threat of climate change is squarely within the Fed’s mandate.”
What To Watch Out For:
Regulators have pointed out that financial institutions may need to start replacing loans to fossil fuel companies in their loan portfolios.
Beyond integration of climate factors into stress tests, financial institutions could soon become more accountable for their role in addressing the risk of climate change overall. In September, 2021 a consortium of advocacy groups wrote a letter to the Federal Reserve Board, the OCC, the FDIC and the NCUA urging the agencies “to begin pushing banks to address climate-related financial risks caused by both the physical damage from wildfires, floods, and hurricanes” in addition to an ultimate transition away from the fossil fuel industry.
“You must promptly provide specific guidance to banks that discusses both the physical and transition risks of climate change; details specific issues that examiners will consider, measure, and evaluate; and provides banks with clear expectations,” the letter reads.
The Commodity Futures Trading Commission echoes the sentiment in a report that says “climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.”
Ignoring the need for the industry to modify its lending practices to be more sustainable may be a mistake long-term. This was the subject of a panel led by the World Economic Forum.
“We’re going to see more climate disclosure requirements,” said Ruchi Bhowmik, Global Vice Chair of Public Policy at Ernst & Young during the panel. “The train is coming. You would be well served to jump on board now.”
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Modern Sustainable Finance: Realities & Benefits
“Sustainability” was described earlier. “Sustainable finance” is even more relevant to banking.
Simply put, sustainable finance requires banks and credit unions to review their loan portfolios and policies to determine the impact they have on the environment and society in general.
For example, The Rainforest Action Network, an environmental organization based in San Francisco, found that in the five consecutive years following the signing of the Paris Climate Accord in 2015 the top 60 biggest banks in the world contributed $3.8 trillion worth of financing to fossil fuels.
It’s not all about risk assessment. Dr. Ben Caldecott, Director of the Oxford Sustainable Finance Program at the University of Oxford, maintains that “sustainable finance create[s] huge opportunities for the banking sector. This extends from green mortgages enabling energy efficiency retrofits through to empowering individuals to engage constructively with companies. These efforts can help normalize and mainstream behaviors necessary for tackling climate change.”
Banks in the U.K. and The Netherlands have experienced benefits after implementing sustainable initiatives, such as increased customer retention, according to Mobiquity. American banks say that implementing green business strategies makes it easier to keep up with the competition — neobanks in particular.
Here are several examples of sustainable finance initiatives of large banks:
JP Morgan – Pledged to facilitate financing in climate action and sustainable development ventures worth $2.5 trillion over the next ten years. The bank also set a target in 2021 to reduce its Scope 1 and Scope 2 greenhouse gas emissions by 40% by 2030.
Bank of America – Says that it procured 100% renewable energy in 2019, and is now focused on funneling $1 trillion into sustainable economy initiatives by 2030. These will include different goals, such as “low-carbon energy, energy efficiency and sustainable transportation, in addition to addressing other important areas like water conservation, land use and waste,” according to the bank.
Lloyds Banking Group – Pledged to cut the amount of carbon emissions they finance by more than 50% by 2030 and achieve net zero carbon operations by 2030. To accomplish this, the U.K. bank has pivoted so that 100% of its global electricity demand comes from renewable sources. Also it is working to cut out 42 million items of single-use plastic from offices and branches.
Citibank – In its 2021 Environmental and Social Policy Framework pledge, Citi promised to invest $250 billion in sustainable solutions by 2026 as part of its Environmental Finance Goal. It also joined the commitment to achieve net zero greenhouse gas emissions by 2050.
Next Steps Financial Institutions Can Take
Not every bank or credit union can afford to invest millions in green initiatives. There are plenty of other sustainable solutions that financial institution leaders can pitch to executive teams and board members, including (but certainly not limited to) these two:
1. A Green Lending Portfolio
In Mobiquity’s report, David Callaway, Founder and Editor-in-Chief of Callaway Climate Insights and former Editor-in-Chief of USA Today and MarketWatch, maintains that “the lending books of many banks are rapidly changing, with green bonds, green loans and other green financings rising rapidly around the world.”
Yet it can be difficult to transition the loan books away from non-sustainable financing. That is why there are catalysts in the industry, such as the Net-Zero Banking Alliance, a consortium of 43 banks committed to “aligning their lending and investment portfolios with net-zero emissions by 2050.” The Alliance is convened under the auspices of the U.N.
Financial institutions can also look to the UN Environment Programme Finance Initiative (UNEP FI) — Principles for Responsible Banking, which is looking to help banks revitalize their existing lending portfolios. The program currently is comprised of 250 banks that represent 40% of the world’s banking assets.
2. Digital Transformation
Banks and credit unions may be surprised to learn that even a digital transformation strategy means they are being more sustainable. Ruby Walia says he’s surprised financial institutions don’t take more credit for it.
Take, for instance, both the monetary cost and environmental cost of checks, says Walia. Creating a digital version of an analog system can instantly reduce a financial institution’s carbon footprint.
Additionally, even keeping consumer and bank data in the cloud — instead of every financial institution maintaining their own data center and servers or using a physical paper trail — can greatly influence how much energy is being used.