Climate change is the biggest issue facing our planet, yet most people aren’t taking action to solve it. With their involvement in the everyday life of billions of consumers and businesses, banks have a unique position to drive corporate climate action on a massive scale.
65% of banks surveyed in the Americas, Europe, and Asia-Pacific have pledged to reach net-zero financed emissions by 2050, and sector-wide coalitions such as the Glasgow Financial Alliance for Net Zero have emerged, with more than 450 financial institutions defining actionable strategies to drive action.
In practice, banks have begun the process of measuring the impact of their own operations, and taking action to reduce emissions.
Banks also have an outsized ability to enact change through lowering their financed emissions, which can be up to 95% of their overall carbon footprint. Taking action to reduce financed emissions begins with effectively and accurately measuring carbon emissions within a portfolio, and setting targets to achieve. Banks must then develop models and guidelines that help direct portfolio creation, growth, and divestments in a manner that best aligns to emissions reduction while meeting profitability goals.
In this way, banks can help accelerate the adoption of net-zero goals by prioritizing investments into companies that have set net-zero targets.
In addition, consumers are increasingly seeking banking and financial services that provide more sustainable offerings from green mortgages or checking accounts to using recycled plastics for bank cards to programs that help clients better understand their personal emissions impact and unlock cash back or discounts on sustainable products.
How can banks navigate? What should they do?
To help us all take more effective climate action, we asked five leaders for their perspectives on: 1) the trends that will define the imperative and opportunity for banking, 2) the actions they’re taking to become more sustainable, and 3) the role of carbon credits in corporate climate action strategy.
Our expert panel:
Bank of America is focused on working with both supply and demand side clients to drive down green premiums
Karen Fang, Managing Director and Head of Sustainable Finance, Bank of America
We’re seeing greater urgency and actions as more public- and private-sector organizations recognize the risks of climate change and make changes to their operations and supply chain to transition to a low-carbon economy. Yet significant challenges remain, especially in hard-to-abate sectors. It will take time to develop and implement the technologies and policy changes that will decarbonize these sectors. More work needs to be done to support and scale solutions in energy and resource efficiency, renewable energy, sustainable buildings, transportation and water systems, regenerative agriculture, as well as improved forestry and pollution control measures. However, these efforts may need to be complemented and amplified by simultaneous emissions reduction and removal activities that can be met by high-quality carbon credits today. Proven carbon removal solutions can be used more broadly while other nature-based and engineered solutions evolve.
At Bank of America, we lead by example and have mobilized and deployed approximately $410 billion since 2021 as part of the firm’s commitment to dedicate $1.5 trillion to sustainable finance activity by 2030. We see this as part of a broader, economy-wide mission to focus on three areas:
- Expanding capital availability and deployment for mature decarbonization technologies (such as renewable energy, energy efficiency and EV production)
- Developing customized financing to expedite the development of emerging technologies (such as carbon capture and sequestration, green hydrogen, long-duration energy storage, and biofuels including sustainable aviation fuels)
- Delivering blended-finance solutions for emerging economies in collaboration with governments, multilateral development banks, and development finance institutions.
To scale adoption of clean technologies, we must continue to drive down the “green premium.” The financial sector plays a critical role in this. From 2010 to 2019, the price per megawatt hour of solar electricity dropped from $378 to $68, thanks in part to the financing that capital that was deployed into the renewable energy industry. BofA is one of the largest renewable energy financing providers in the US. Another example of driving down the green premium is electric vehicles (EVs), with Bank of America providing consumers with financing options that make it more affordable to lease EVs and install residential chargers. The key is to increase both demand signals and supply to increase volume which is often associated with lower costs.
As one of the largest global financial institutions that is committed to reaching our own net zero targets and supporting clients in their transition, we are also hoping to contribute to a more transparent, liquid, and scalable voluntary carbon market. This includes our work and support for proper framework and disclosure, governance, and ratings; verification and certification; transparent data access; and robust spot and forward trading, as well as carbon financing capabilities. Once the appropriate market framework and structure are established to properly develop this asset class, voluntary carbon credits can become one of the practical solutions to help boost capital deployment in carbon removal and reduction projects, as industry sector-specific decarbonization technologies mature and scale up.
Banks can help industries to decarbonize and build more climate-resilient business models
Emma Crystal, Chief Sustainability Officer, Credit Suisse
As a facilitator of finance, the banking industry has an important role in helping businesses switch to less carbon intensive operations, and more climate-resilient business models. A particular area of focus for many banking clients is seeking to mitigate the effects of climate change by switching to less carbon intensive energy sources, a transition that requires large-scale investment in key market sectors. With its ability to mobilize capital, the banking industry is well-equipped to support this transition. In addition, an emerging theme in 2023 and beyond is the significance of biodiversity - a topic where collaboration and partnerships with other stakeholders is key – for example through our ocean engagement partnership alongside Rockefeller Asset Management and our annual Conservation Finance Conference alongside Cornell University.
In regards to our own efforts to achieve more sustainable operations, Credit Suisse has been replacing fossil fuel heating with renewable energy, as part of our goal to achieve net zero emissions across our own operations and supply chain. We are in the process of implementing a variety of measures across all regions to maintain standards to meet or exceed relevant environmental compliance obligations; improve our environmental performance, stewardship, and pollution prevention; and communicate our environmental commitment, performance, and policy to our employees and external stakeholders. We also publish a Task Force on Climate Related Financial Disclosures (TCFD) report that provides a summary of our progress toward our climate ambitions. Through our involvement in multiple market initiatives, we aim to improve our own reporting and disclosures, and to regularly report on our progress in a standardized format that is credible, transparent and comparable to prior periods.
We recognize that the permanent removal of carbon from the atmosphere is an important aspect of achieving net zero. We are focusing on emissions reductions to achieve our 2030 interim goals and will be considering the role of carbon removal credits toward achieving our 2050 net zero emissions. In the interim we are facilitating conversations, such as our Carbon Negative Conference 3.0, with industry experts across public and private sectors working on innovative technologies including direct air capture, ocean carbon removal, rock mineralization, carbon utilization, alternative or negative fuels, and new approaches to carbon removal.
Through their own operations and through their portfolio of clients, banks can help accelerate economy-wide efforts to achieve net zero
Jennifer Livingstone, Vice President, Enterprise Climate Strategy, RBC
The climate transition will be one of the most complex economic challenges of our time, and getting to net-zero will require unprecedented coordination from government, businesses, and individuals. We believe there is tremendous potential for financial markets, and at RBC, we are supporting our clients in energy transition and decarbonization.
We believe that by demonstrating the ways in which a large enterprise can make meaningful change, we can serve as a guide to our own clients. At RBC, we have committed to reducing our GHG emissions by 70% with a baseline year of 2018 and to increase our sourcing of electricity from renewable and non-emitting sources to 100% — both by 2025. We’re investing in smart building technologies for our leased and owned buildings, and have policies in place that define requirements for the properties where we lease space, such as green building certification schemes and energy performance reporting.
While the global path to net-zero requires the widespread adoption of mitigation activities, it will also benefit from the scaling of new technologies and natural carbon sinks. Private capital that is directed to impactful, cost-effective mitigation activities helps emerging technologies prove and scale operations, including activities that help avoid emissions (such as renewable energy projects) as well as those that remove emissions such as nature-based solutions and emerging technologies like direct air capture). RBC has been carbon neutral in our global operations since 2017 by reducing emissions and purchasing certified offsets. We buy and retire offsets annually to cover all reported Scope 1, 2, and 3 (business travel) emissions in that fiscal year. The carbon offsets we purchase are verified by third parties and fulfill the methodologies of the carbon offset registries to demonstrate additionality and permanence.
Beyond our own operations, we see sustainable finance as an opportunity for our clients and our own business. We have committed to providing $500 billion in sustainable finance by 2025 to support our clients’ environmental, social and governance (ESG) objectives. This involves educating and guiding clients on how they can take action to measure their own emissions, set targets, and implement efforts to reduce emissions. Between 2019 – 2022, we have provided approximately $282 billion towards this commitment, such as establishing the Green Bond Framework with Public Sector Pension (PSP) Investments, and supporting John Deere Capital Group on its inaugural sustainability-linked notes filing, that helps the organization hit defined ESG targets including GHG reductions.
How banks can head off the risks climate change poses to borrowers
Many banks, including OakNorth, are undertaking efforts to improve the sustainability of their operations. We have set a goal of net zero by 2035, and have already implemented renewable power sources to help us reach net zero for our scope 1 and 2 emissions. We are actively working with our supply chain to identify our areas of greatest impact for scope 3.
We also make use of a balanced mix of avoidance and removal carbon credits to mitigate some of the residual emissions that we are not yet able to reduce. We take great care in striking the right balance between our ongoing reduction efforts and recognizing the important role that credits play in helping early-stage carbon removal businesses prove and scale their technologies.
Whilst there is considerable time, effort, and cost involved in helping businesses transition, banks have a unique ability to make an outsized impact. As a lender, our greatest source of emissions comes from our loan book, of which we have worked hard to measure the full scope 3 financed emissions during the last year. We’re now beginning to plot out how we might begin to drive down these emissions, ambitiously targeting net zero by 2035. We’ve started by engaging directly with our customers at both origination and review to better understand their position and climate challenges while providing education, tools, and advocacy on how they might reduce their own climate impact and where we can support and help finance their transition.
Increasing climate-related regulatory demands and embedding of climate into risk management processes is requiring banks to develop clearer data strategies and evolve current data capture and aggregation into more sophisticated, automated systems. Regulators the world over have begun to highlight the risks that climate change presents to financial stability, and the impact of both physical and transitional risks on the creditworthiness of even the most resilient businesses. For example, where traditional data may suggest a borrower is in good financial health, climate scenarios and related supply chain issues could create additional stress or increase the risk of default.
This presents challenges for lenders, as it requires them to have a loan-level understanding of the borrowers in their portfolio based on often limited or incomplete carbon emissions data, and look deeper into the wider value chain that each borrower is exposed to. Banks now need to consider a broad range of granular, forward-looking views of how these businesses could be impacted by unfamiliar climate-related variables over much longer timescales. Technology, such as that developed by ON Credit Intelligence, can provide early warning indicators in such situations, enabling banks to work with their customers to agree on the best way forward and hopefully minimize or completely avoid credit losses from climate risks.
The financial services industry is leveraging technology and know-how to measure, reduce and remove the impact of their carbon footprint
Bryan Hollaway, Senior Principal, Slalom
2023 appears to be a pivotal year in our shift to a low-carbon economy. Renewed urgency is being stressed by scientists. New regulations are coming into effect globally. And the solutions we require are being adopted and the speed of this adoption is what the financial industry can accelerate.
The IPCC’s March 2023 synthesis report confirmed we’re currently on pace to reach 1.5°C in the early 2030s. Although dire in its predictions based on the stubbornness of the emissions curve (2022 set a new high for global emissions), the report also stresses that we have the tools at our disposal to reach intermediary goals toward achieving net zero emissions.
In response to the increasing urgency for action and the disclosure requirements, financial institutions are stepping up. Over 40% of global assets are now under commitments to align lending and investment portfolios to net zero emissions by 2050 as part of the UN convened Net-Zero Banking Alliance. Members are committed to set near-term (2030 or sooner) and 2050 targets with the focus first on the most emissions-intensive industries. These banks, and many others, are recognizing the monumental shift away from a carbon-based economy as an investment opportunity, which is why ESG assets are on pace to reach 21.5% of global assets under management by 2026, or $33.9 trillion.
To prepare for regulatory compliance, Slalom’s clients are implementing sustainability management software, such as Salesforce Net Zero Cloud for auditable carbon accounting. Slalom has enhanced that software to track and visualize data on sustainability initiatives tied to a company’s overall carbon footprint. One such customer, Mastercard, will next focus on tackling emissions in their supply chain and moving beyond EEIO averages to differentiate between suppliers leading and lagging on the carbon transition.
A commonly referenced framework for climate strategy is to avoid, reduce, replace, and offset. Financial institutions are actively avoiding and/or replacing investments in carbon-intensive industries with hopes of replacing them with low-carbon alternatives. To say this strategy is a boycott of carbon-intensive industries oversimplifies the solutions required to the point that it would slow our transition.
Alternatively, financial institutions are taking a nuanced approach to selecting investments (including in historically high-emitting companies) that are on the transition journey themselves. For example, many of these companies are investing in early-stage technologies such as carbon capture and storage (CCS), which increasingly looks like a required part of our global strategy. But we don’t have to wait for CCS technologies to become readily available before we can work to reverse the carbon flow. Carbon credits, particularly those that are nature-based, offer a viable option for sequestering carbon from our atmosphere today. These nature-based solutions also help address other man-made environmental impacts such as deforestation, biodiversity loss, and pollution.
We should be leveraging every solution we have at our disposal – a point UN Secretary General António Guterres made when announcing the synthesis report – “Our world needs climate action on all fronts — everything, everywhere, all at once.”
Not all these opinions necessarily reflect Patch’s outlook on how banking and financial services firms will operate as they navigate the challenges and opportunities relating to corporate climate action. We believe information transparency is absolutely critical to each of us making the best choices in a rapidly-changing space. That’s the same attitude we take with our products and solutions.