Banks’ role in driving a positive climate impact

Let’s not kid ourselves, banking is not a green industry. It has evolved over too many years, with spiderwebs of complex IT systems burning hundreds of terawatt-hours every year. Even with the best intentions, it will take time for the banking industry to move to new technologies that will minimise their carbon footprint – not to mention the footprint of their customers. 

This makes it difficult to really brandish the sustainability flag credibly. But that’s not to say the financial services industry has no role to play in building a more sustainable future – quite the opposite.

Money makes the world go round, so banks – as custodians and puppet masters of the money world – are in a unique position to impact sustainability. Our financial systems have the potential to drive meaningful change, as they sit at the heart of the ecosystem – they hold the cards on which businesses get funding, and what services are offered that support growth, and they can use their influence as a force of good.

Yet for banks to really own this role, they need to get serious about sustainability. It needs to be on every board agenda so that it becomes fundamentally important and a measure of success. We need to mainstream sustainability, creating repeatable measurable ways to assess the impact and drive change one transaction at a time. At the heart of all this is data.

The winds of change are in motion

I have been a member through my directorships at the Ecology Building Society and Centenary Bank of the Global Alliance for Banking on Values (GABV) – a global consortium of 74 banks and financial institutions dedicated to driving positive change – for several years. These players are setting the example of how banks can be a force for good in the world. They represent over 60 million customers and over two hundred billion dollars of funds under management. 

Late last year, the group met in Bangladesh, and I was impressed by the work that is being carried out. The Bank of Palestine has been pursuing a Green Loans programme for individuals in rural areas for greater water and energy efficiency. FINCA DRC has committed to planting 100,000 trees, and creating environmental education in the DRC. 

Meanwhile, Bank Australia has purchased a private conservation reserve to protect a 2,117-hectare site in Western Victoria from any future development. And Banco Popular de Honduras has applied the PCAF Standard to measure the GHG emissions in the agriculture sector. 

These are all great steps which show that banks can make value-driven decisions that help to protect the planet. Yet the challenge many of these institutions face is a data gap. How do I prove the impact of such initiatives? How can I measure it? What is it really doing? How do you use data historic, stream of conscious data to show the impact you are all making? Yet many of these more traditional institutions struggle to get to that data as they are still reliant on legacy technologies. This is where newer, cloud-based challengers have the edge.

Driving consumer action at a transactional level

While the data gap is a challenge for more established players, many cloud-native challengers are turning data into a core strength which has the potential to really drive changes in behaviour. Transaction-based carbon accounting is an area we are already seeing a lot of traction in that could become standard practice in the years to come.

There are several real-time carbon calculators now available that can enable banks to give consumers a view of the impact of a transaction. This can help to foster better consumer behaviour, giving people a choice over how they offset their impact or whether they want to use a certain provider. I envisage this being an area for growth in the future and a key differentiator.

The key again is data. By showing people what impact they are having they can choose how to offset that impact or potentially take a different path to lessen it. Over time this consumer power could start to invoke change in how businesses operate. Yet on its own, it will not shift the needle – we need to dig deeper.

Building sustainability into the fabric of loan origination

While all of this work is really great to see, there is even more that banks can do by building sustainability into their core business – lending. Banks are already masters of destiny when it comes to which businesses will get the funding they need to grow, or if a person can get a new home. This puts them in a strong position to effect change. 

New providers are taking the lead here, with trade finance lenders such as Times International entering the market to help SME clients and their suppliers to move to net zero carbon emissions. This is achieved by measuring carbon reduction delivered both in international trade and UK lending.

By bringing a sustainability lens to the lending application process, banks can influence companies – even individuals – to question their behaviour, while incentivising positive action. For example, if someone applies for a mortgage on a Passive House home then they can get preferential interest rates. They could also bring in policies around purchasing, how an applicant chooses third-party suppliers, whether they have a measurable climate plan, and right down to procurement processes. By forcing companies to report on such aspects, banks can help to drive change.

And this doesn’t all have to come out of the goodness of their hearts. It will benefit banks too. Regulation in this area – like the FCA’s proposed Sustainability Disclosure Requirements (SDR) – is rapidly evolving and consumer demands are changing. By taking a more proactive approach to sustainability everyone wins – including the banks.

Mainstreaming sustainability

Ultimately, changing the world means mainstreaming everything. There are the outliers leading the way, such as the GABV, who are agitating for change. There are also the challengers that are bringing in access to data that helps to inform change. We now need to mainstream and bring sustainability into the core business. This means banks moving to a modern core banking platform that enables access to the real-time data needed to measure environmental impact and drive real change.

Measurement must go beyond simply calculating and offsetting carbon footprints, to deliver a more nuanced understanding of impact linked to social aspects, such as inclusivity and jobs. Detailed impact assessments are a must and these must be supported by data. Having data at the core of this will allow everyone in the financial ecosystem – from consumers to business owners and the wider supply chain – to make radical and rational choices for the environment. All action is better than no action!