While banks do not contribute heavily to damaging the environment on their own, they finance many businesses that can have either a positive or negative impact on the Earth. Because of this indirect link between bank lending and damage to the environment, many bank leaders and activists see financial institutions as a critical link in the effort to slow environmental damage and global climate shifts.
Bank leaders who understand the link between their operations and the environment can tailor policies to minimize negative impacts. And by adapting to these changes, business leaders can ensure their decisions meet these constantly evolving consumer and regulatory demands.
Why are banks interested in environmentalism?
In 2018, a UN report concluded that limiting the temperature increases to no more than 1.5° C would mitigate the most severe implications of climate change. However, temperatures have already risen 1.1° C since the 1800s. In fact, the decade from 2011 to 2020 was the warmest on record. If current trends hold, temperatures will rise an estimated 2.7° C by the end of the century. This has led many industries and governments to make changes that attempt to slow these effects.
In recent years, banks have recognized that they also play an important role in protecting the environment. That’s because the easiest way to impact change is often through financing. As more emphasis is placed on environmentally friendly regulations, even more banks may find themselves evaluating their practices to ensure they aren’t financing environmental harm.
How are banks going green?
The largest American banks have taken steps to increase their sustainability and have shifted their lending practices to promote environmentalism. Some of these steps include:
Quantifying Environmental Risk
Environmental harm poses a risk to the planet but can also increase risk for businesses. An increase in severe weather could destroy property, impact production, and increase insurance costs for many individuals and businesses.
Banking for Impact is working with Harvard Business School to create a new way of measuring the environmental and social impact of financing. This project would provide a framework for quantifying the social and environmental impacts of lending activity. This would give banks a common method for evaluating the impact of their lending activity so that they can make more informed decisions about which credit applications to accept.
Shifting Lending Practices Away from Harmful Activities
Even without this framework, banks are shifting their investments away from environmentally harmful projects. According to the Banking on Climate Chaos report, which was undertaken by a collection of climate change activists including the Rainforest Action Network, several U.S. banks have reduced their financing for fossil fuels over the past few years because of their harmful effects on the environment. For example, JP Morgan Chase reduced fossil fuel financing from $63.7 billion in 2016 to $51.3 billion in 2020.
Investing in Climate Friendly Projects
In addition to considering environmental risks when determining whether to issue debt to companies, banks are also actively seeking ways to invest in environmentally friendly projects. By 2030, Bank of America has pledged to invest $1 trillion in low-carbon initiatives including efficient and renewable energy, sustainable transportation, and water and forestry conservation efforts.
Reducing Their Own Carbon Footprint
Outside of financing activities, banks are also working to reduce their own environmental impact. For example, Mascoma Bank which has 31 locations across the Northeast, has partnered with companies to install solar arrays to offset the energy usage of each of their bank branches. Additionally, when looking to renovate some of these locations, bank leaders are considering the sustainability of materials to be used and how waste will be disposed.
How can banks join the green movement?
Going forward, banks can do a lot to support a healthy environment. They can invest in environmentally friendly initiatives and reduce their own carbon footprint. Banks can also shift their lending practices to ensure that the projects they fund have a neutral or positive impact on the environment.
To implement these changes, banks can add environmental impact to their risk analysis when determining creditworthiness. They can also adjust their current programs to promote positive changes in the businesses and individuals they serve. For example, banks can offer green mortgages which discount the mortgage rate if the building meets specified energy standards. Additionally, banks can offer sustainability-linked business loans which discount loan rates for businesses that meet ESG goals.
Which banks are going green?
The largest banks are becoming increasingly aware of their role in reducing climate change. Bloomberg tracks 22 diversified banks with market caps over $10 billion. Last year 19 of those banks mentioned climate change in a public statement and all 22 of them mentioned sustainability.
Banks are doing more than talking about climate change. So far, 7 US banks have joined the Net-Zero Banking Alliance which was founded in April 2021. Members of this organization commit to transitioning their operations and investment portfolios to reach net-zero for greenhouse emissions by 2050. Additionally, members agree to set more near-term goals and annually report on progress. Globally, the members of the organization make up more than 43% of banking assets and have pledged $66 trillion to the organization’s goals.
Impact of Going Green on Business Results
Although many believe that shifting to a more environmentally friendly portfolio would negatively impact bank profitability, this has not proven to be the case. Values-based banks have business models centered around the triple bottom line — focusing on communities, the environment, and profitability. According to the Global Alliance for Banking on Values [GABV], values-based banks saw significantly higher growth than large, traditional banks.
In the report, large banks are referred to as Global Systemically Important Banks [GSIBs]. Between 2008 and 2017, values-based banks saw deposits increase by 13.2% compared with GSIBs, which saw a 4.8% increase in deposits. Total Revenue for values-based banks also grew at a faster rate. Values-based banks saw revenue grow by 9.5% while GSIBs saw an 8.1% increase in revenue over the same time period.
Community Banks Focus on Sustainability
It is not just large banks who have built their brand on sustainability and values-based practices that can reap the benefits of implementing sustainability initiatives. A research report commissioned by the GABV and supported by the European Investment Bank and Deloitte showed that community banks that focus on sustainability also see higher investment returns. The report shows that “banks that consistently scored high on material ESG issues delivered higher risk‑adjusted returns compared to those banks that performed poorly on the same issues.”
As consumers, government officials, and business leaders continue to increase their focus on environmental issues, more banks will follow suit. By maintaining a “green” portfolio, banks can protect their reputation, increase the positive impact they have on the world, and improve business results.
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