Insights

The green revolution has been underway in the energy sector for two decades; now it’s transforming the financial sector. 

If your bank is not making the transition, it risks missing out on lucrative and innovative opportunities in the new green economy.

Companies everywhere are building climate and sustainability into their business strategy and value propositions. New standards and operating models are being set. Just like the transition to the digital economy of the 2000s, the transition to the green economy will be all-encompassing and deeply transformative. Banks are an integral part of the broader economy, from household to national level, and those not urgently undergoing this essential transformation, risk becoming irrelevant in the changing commercial landscape. 

To be clear, this decade will see nothing short of a sea-change in how businesses operate and where investments are made. Banks will only remain viable by greening their business and, to stay competitive and able to attract talent in the workforce and the best clients, they need to act now.

There are huge advantages for banks in leading this change, both in terms of reputational kudos and in financial risk reduction, such as limiting their exposure to bad loans. Greening a bank is about more than simply adding a few sustainable products, but help is available. Deep institutional change does involve time and effort, but it is essential and there are new business opportunities that early adopters can be part of. 

“Green banks are the future. Climate change can no longer be viewed as just an environmental concern as it affects all economic sectors,” explains Borislav Kostadinov, Fund Director at Finance in Motion, advisor to the GGF. “But a green transformation needs everyone in the financial ecosystem to play their part.”

Towards NetZero 
Governments know that reaching their NetZero emissions targets requires significant investments across all sectors of the economy, and greening the banking system is key to making these investments happen. As a result, the policy landscape is changing across the world, with new financial initiatives and regulations that shifts capital toward green objectives, and addresses climate-related and environmental financial risks.

This presents an excellent opportunity for banks to differentiate themselves in their local market by offering customers green lending packages and establishing a reputation for progressive environmental business services. GGF, the market leader in green finance, has a long track record in supporting its partners to make the green transition, and provides valuable technical advice and organisational assistance.

“We can help banks develop a green portfolio, by understanding what green products they can offer their clients, in the corporate, retail, households or other business space,” says Lachlan Cameron, Director at Finance in Motion, advisor to the GGF. “For instance, banks might specialise by offering householders loans for solar panels, or make green infrastructure investments with renewable energy companies.”

Riding the green wave
The trend around banking has already shifted in the EU and other major economies, with regulations that require institutions to analyse their finance chains for carbon emissions, and other climate risks – lending capital for a housing development on a floodplain, or a factory for combustion vehicles, is increasingly difficult and unattractive; whereas, investments in renewable power initiatives and energy-saving improvements, is becoming cheaper and easier. It means that when industries apply for finance, they are asked detailed questions about their carbon emissions and environmental impact.

While banking institutions in the EU must already comply with the existing regulatory framework for greening finance, those in neighbouring nations stand to benefit from adopting a green strategy now. Investors and lenders outside the EU can future-proof their businesses by aligning now with stricter EU regulations. Increasingly, this will give them better access to finance from the EU. Early adopters entering the green banking space stand to profit from long-term benefits, including a less-risky portfolio and reduced possibility of reputational damage from problematic investments. 
“’Deep greening,’ or in other words, integrating sustainable finance principles provides  a business opportunity for banks to build a strong portfolio of high-quality green assets, and win the most innovative clients by positioning themselves as distinctive market leaders in the green banking market,” says Kostadinov.  “That’s why we are supporting financial institutions navigate sustainable finance developments as they create diverse green financial instruments.”
 

Banks will be able to attract clients looking to invest in sustainable upgrades to their homes and businesses, from loans for solar panels to more energy efficient production equipment.Clients will increasingly demand competitive green products to help improve energy and resource efficiencies, which also makes economic sense. Making “green” improvements also makes businesses more resilient, which means borrowers are less likely to be impacted by climate transition risks, and hence more reliable in terms of repayments.

Standing out
“Offering green packages and expertise is a way to differentiate your banking operation in a busy financial services market, and will be something that makes your business a frontrunner,” says Cameron.

Financial institutions that can provide a portfolio of green loans are at a competitive advantage, able to benefit from the huge range of business opportunities, investments and alliances in the new green economy. 

Regulatory change will soon reach countries outside of the EU. Indeed, most are already being affected: as a subsidiary of a European parent company; being listed in London or Frankfurt; or reliant on capital from international sources. Banks and financial institutions that are located in states that trade heavily with the EU or are vying to join the EU, such as the Western Balkans, will need to align themselves by complying with EU regulations on green finance. Shareholders and investors will increasingly demand robust sustainability reporting and climate risk decision-making at the highest levels. Banks who do this will access capital more easily.

So how does a financial institution make the green transition? 
Banking institutions will need to create dedicated green lending teams with local knowledge to advise customers on a range of new green loans and packages. And this new green ethos needs to be communicated internally, as well as conveyed to potential clients. Broadly, it’s about integrating sustainability goals throughout their practice and mission. This means integrating sustainability metrics into the usual risk analysis and credit analysis that banks already carry out, and ensuring there are environmental and social safeguards when lending. In other words, climate-associated risks, such as flooding or reputational damage of, say an oil spill, need to be factored in when making lending decisions. This will involve using dedicated environmental risk assessors, perhaps employing in-house expertise.

GGF helps support banks in this transition, with long-term advice and assistance and by offsetting the costs of building a team with green expertise. GGF has worked with micro financial institutions for nearly a decade and helped them become leading green institutions in their markets. GGF’s hyper-local experts provide long-term partnership and support for community-based banks and financial institutions. GGF provides for free a dedicated local consultant to help support banks as they create and train a green team, and to help them realize the full potential of offering a new package of green loans and services. 

It may seem daunting to transition from traditional lending patterns and financial practices, but much of the initial work entails banks getting a more complete understanding of their own investments and clients, using better data – which is an essential part of running a better and more efficient operating strategy. There are upfront costs, but these should be more than compensated for by medium-term gains. There are real benefits to being a market pioneer in this global transition that will have far-reaching economic consequences for every nation. 

Financial institutions globally have been taking initiative on cleaning up their investments, pushed by shareholders and data projecting the catastrophic fiscal risks of unmitigated climate change. One study (Footnote 1) calculates a global fall in GDP by 15-20% if global temperatures are allowed to rise to 2°C above preindustrial levels, and could cost the global economy $23 trillion by 2050 (Footnote 2). Damages due to delayed mitigation action rise by $0.6 trillion per year in 2020 (Footnote 3). In other words, the sooner we mitigate, the more cost-effective it will be.

Many big operators are forming industry-led alliances, nationally, regionally, and globally, with ambitious green commitments, including to phase out investment in polluting industries, such as coal. This April, for instance, 43 major banks came together in a UN-convened NetZero Banking Alliance – there is also a UN-convened NetZero Asset Owner Alliance, the NetZero Asset Managers Initiative, and the Paris Aligned Investor Initiative. These have been brought together, by UN Special Envoy for Climate Action and Finance, Mark Carney, into a global alliance of 160 firms (together responsible for assets in excess of $70 trillion), creating the ‘Glasgow Financial Alliance for NetZero’ (GFANZ).

Change is already here; it’s time to lead the charge.

---------------------------------------

Footnote 1: www.nature.com/articles/d41586-018-05219-5
Footnote 2: www.swissre.com/institute/research/topics-and-risk-dialogues/climate-and-natural-catastrophe-risk/expertise-publication-economics-of-climate-change.html
Footnote 3: www.nature.com/articles/s41598-020-66275-4