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Sustainable banking is happening a lot quicker than we realize 07 April 2021

All around the globe, banks are making bolder environmental commitments.
There is a new sense of urgency in the world of financial services. Whether it’s Wells Fargo deploying an additional $500 billion to sustainable finance by 2030, the private banking arm of DBS aiming to expand its suite of sustainable investments to more than half of its assets under management by 2023, or UniCredit committing to a total phase-out of coal sector financing in all markets by 2028, there is a new announcement seemingly every day from financial players, big and small, committing to more ambitious ESG goals.

Only a few years ago, sustainable banking – the movement by financial institutions toward zero greenhouse emissions and abstaining from investing or financing any fossil fuel-related projects – was a far-off ambition. Banks would put out a statement with some hazily defined 2050 targets and call it a day. Now, environmental concerns are moving to the forefront of banking strategies with widespread recognition in the industry that bolder is better.

There is a push and pull dynamic going on here. The pull is coming from consumers who are rapidly becoming conscious of what they are buying and consuming. With the effects of climate change becoming more evident to more people, consumers are changing how they shop. When people go to the grocery store or shop for new clothes, they are increasingly aware of how items are sourced, produced, and delivered. People want goods they can feel good about buying.

The push comes from the fact that these same sustainably-focused consumers are also employees and even leaders of major institutions. They are going to work with the same mindset they bring to the grocery store and pushing their companies to do more in the ESG space. It’s part of a conscious capitalism movement that purports business should serve a higher purpose than mere profits and shareholder value. A lot of companies aren’t waiting around for a government regulation to push them to do the right thing.   

When it comes to banking, the phenomenon isn’t quite as straightforward as checking the label for an organic marker. As much as neobank founders might wish otherwise, people don’t shop for banks the same way they do for consumer goods. It’s easier to identify sustainably-sourced salmon than a sustainably-sourced bank. There is, however, a growing awareness among consumers and broader society of the pivotal role banks play in sustaining our fossil fuel-driven global economy. Oil producers rely on continuous access to capital in order to run their businesses. If financing were to dry up, so would the oil wells, according to the theory of change.   

In this environment, what banks can do is quite literally put their money where their mouth (or ESG banking strategy) is. Instead of funding another oil exploratory project in the North Sea, financial institutions can put their vast resources toward more conscious uses. Efma member AIB raised €1 billion in the first green bond issuance by an Irish bank last fall. These green bonds are used to finance renewable energy projects like low carbon offices and the construction of energy efficient homes.

Banks are also providing new tools for their customers to check their own energy consumption. Santander has just launched a free “Home Energy Report” that will highlight the areas in which a customer can prioritize in terms of energy efficiency improvements as well as the associated costs.

For those that do want to shop for environmentally-conscious banks, green neobanks are providing an attractive option. Much like socially-focused neobanks creating offerings tailored to the unique needs of certain communities, green neobanks are designed for those who want to do good when they bank. Bunq, the Dutch neobank, has an Easy Green offering that includes tree planting and a host of green-related features. Aspiration is another great example in America. They also offer the chance to round up every purchase to help plant trees. They go even further by giving 5% cash back for socially conscious spending.

With everyone hopping on board the ESG train, the concern then becomes greenwashing. How do you weed out the true adherents versus those institutions who are merely slapping an ESG label on a product or investment to earn some positive press and stay in the good graces of their customers?

As the new commitments come thick and fast, everyone is trying to define some rules of the road. Benchmarking initiatives are being put forward by governments, international organizations, and the private sector. There is an initiative underway by the Big 4 accounting firms seeking to put some quantitative heft behind ESG efforts. Dubbed “stakeholder capitalism metrics”, the framework intends to create “long-awaited consistency in how companies inform investors (and themselves) about their behavior in relation to ESG norms.” With a common benchmark, customers and investors can compare companies and determine who is really taking environmental concerns seriously.

The EU is also trying to get their arms around sustainable investment. Starting last month, new rules, called Sustainable Finance Disclosure Regulation (SFDR), came into effect in the Union that will require managers of ESG funds to put forward a tangible, measurable plan regarding the impact of their investments.

Until there is any sort of uniformity, navigating the world of sustainable finance and determining who is really green, will remain difficult. But, given the plenitude of efforts in this space, it is abundantly clear that the planet is on the minds of executives everywhere.  

There is always a renewed focus on the planet in April, with the 22nd of the month being Earth Day. Sustainable banking isn’t confined to a single month, nor to a single institution. The movement towards responsible and environmental banking has a lot of momentum throughout the industry. For the planet's sake, we can only hope the movement is more than the sum of its press releases and turns into concrete, quantifiable action.

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