What can banks do to fight climate change?
For banks looking to fight climate change, there are four important areas to consider.
Banks are under pressure. The imperative to act on climate changes inches every closer to the boardroom as the risk climate changes poses to financial markets rears its ominous head. From retail customers and commercial clients to investors and employees, stakeholders across the spectrum are expecting banks to step up. And here’s how they can do just that:
- Including ESG considerations into lending and investment decision-making
- Defining transparent sustainability targets and reporting guidelines
- Engaging with relevant stakeholders regularly
- Integrating and promoting sustainable finance products
Including ESG considerations into lending and investment decision-making
The banks of tomorrow are considering the environmental and social impact of their investments and lending activities. By incorporating Environmental, Social, and Governance (ESG) factors into their decision-making processes, banks can ensure that they are supporting activities that promote sustainability and reduce their exposure to high-carbon sectors.
This can be achieved by assessing the carbon footprint of their portfolios and developing strategies to reduce their exposure to high-carbon sectors.
Each lens of the ESG philosophy offers banks a new perspective to consider the non-financial impact of their decisions – many of which affect the financial accepts of their operations.
“Climate change is a game of risk,
and one banks would do well to prepare for.”
The climate transformation is game of money. Retrofitting and rethinking society in the face of a climate crisis is a feat impossible to accomplish without banks.
Integrated ESG metrics guide banks towards investing in research and development to identify new technologies and business models that promote sustainability.
By staying at the forefront of sustainable finance, banks can help to drive innovation and support the transition to a low-carbon economy – and be among the first to do so. In practice this can look like banks go furthering in investing in research to identify new renewable energy technologies that have the potential to reduce carbon emissions.
Defining sustainability targets and reporting guidelines
It starts with a plan. Setting targets to reduce their carbon footprints and other environmental impact, banks can then regularly report on their progress towards meeting these targets.
Setting rigorous, science-backed and measurable targets is key towards a successful sustainability strategy. Yet, you can’t change what you can’t measure. So, a carbon accounting process that includes Scope 1,2, and 3 emissions is the best starting point.
Scope 3 emissions are especially important here. This category covers the indirect emissions produced by a bank’s products. The emissions of investments and loans would become transparent, identifying the biggest opportunities for low-carbon investment.
This work shouldn’t live in a silo, however. Transparent reporting builds trust with stakeholders and demonstrates a commitment to sustainable finance. Infusing the market with this kind of data paves the way for more effective climate solutions.
Engaging with relevant stakeholders regularly
Banks can build upon reporting to engage with stakeholders, such as customers, investors, and regulators, to better understand their needs and concerns related to sustainability.
This can help banks to develop more effective strategies and products that meet the needs of their stakeholders.
By engaging with investors, banks can demonstrate their commitment to sustainable finance and attract capital from those who prioritize sustainability in their investment decisions. This also gives the chance to align on sustainability priorities and the space to align on new specialities to explore in this new age of banking and finance.
An under-engaged segment in green banking is retail banking customers. The potential for climate action in this segment is massive and is set to reimagine this field.
Integrating and promoting sustainable finance products
Sustainable banking is vehicle for new products and growth. This can include renewable energy projects, green bonds, and green loans.
By creating financial incentives for environmentally friendly activities, banks can help to shift investment patterns towards low-carbon alternatives. For example, banks can offer lower interest rates or longer repayment terms for loans to companies that invest in renewable energy or energy-efficient technologies.
A budding scene of climate fintechs are cropping up to fill a gap in the retail banking market. Imbedded fintech, employing the newest in open banking, are increasingly aiding banks in offering next-generation green banking products that inspire and engage their customers.
These specialists are best equipped to help banks future-proof their value propositions by giving their customers what they want and the planet what it needs.
Co-authored by Friedrich Hubel & Max Honzik