Most banks have responded positively to their role in reducing greenhouse gas emissions. Many joined the Glasgow Financial Alliance for Net Zero after COP26 in 2021, and a recent survey found that nearly 60% of the world’s leading banks have committed to net zero and want to become stewards of the global transition to a net zero economy.
The problem is that banks are not designed to take on the full spectrum of risk that such a global transition entails. Their fundamental job is to use customers’ deposits prudently, lending the capital that powers the economy. Yet the transition to a net zero economy is a profoundly uncertain undertaking that teems with the sort of risks they would normally be expected to avoid.
A more realistic approach to financing a green economy would be to look beyond banking—to an ambitious public-private partnership. This would include venture capital and private equity firms, which have bigger risk appetites as well as the mandates and resources to take bets on relatively unproven technologies that will fuel a sustainable future.
Governments and regulators would be included, facilitating and incentivizing their partners. Currently, only 12% of large banks are on track to meet their targets for their own as well as their financed emissions. Even if the biggest risks were to be taken on by the VC sector, banks that wanted to participate effectively would need to make significant changes to their culture, operating practices and incentive systems.
They would need to educate and train their relationship managers to understand their customers’ carbon challenges a lot better and become adept at identifying their individual pathways to net zero. And they would need to source and analyze accurate, consistent data to measure the risk that each customer represents and to track its progress in reducing emissions. The war in Ukraine has made it even more difficult for banks to live up to their commitments.
The energy crisis caused politicians around the world to reconsider their condemnation of fossil-based fuels. Many have resumed or ramped up exploration for gas reserves, coal is making a comeback and Europe is exploring new investments in gas infrastructure. The lack of clear leadership is also evident within banks themselves. Our research found that most leaders are committed to their bank’s climate goals but have not succeeded in embedding this across the organization. Many still incentivize the granting of loans to heavy carbon emitters, which leaves relationship managers asking how they are supposed to act. Employees notice the lack of investment in the required new skills and question the firmness of their employer’s commitment.
We believe consensus will be a priority in 2023. Politicians, regulators, activists and everyone else involved will seek common ground and a realistic approach to achieving net zero. We expect transition finance to become the focus, with meaningful conversations being held around public/private partnerships. We also expect green hype to give way to a greener more realistic allocation of roles and actions.
Veritass have worked with clients from across the banking sector to devise clear strategies and approaches to leveraging benefits that a sustainable approaches in the selling of products and services.