Rebecca Self reports from the convening of March’s Climate Safe Learning Lab, which examined what it will take to balance energy security, affordability and sustainability from a bank’s perspective.
The Climate Safe Learning Lab (CSLL) regularly hosts convenings for its global community members: banking professionals actively influencing the climate agenda within their institutions. The convenings provide a safe space for bankers and experts to discuss the cultural and systemic changes required for a more sustainable finance system. The CSLL is pre-competitive: for example, no confidential information is shared and all events are held under the Chatham House Rule. Bankers attending can also choose to keep themselves anonymous.
In March 2023, the CSLL hosted a convening on credibility and the climate transition, focused on balancing energy security and sustainability. This was the third peer learning convening of the new term.
A model for mapping transformative change: the Three Horizons
In this convening, the energy transition and energy security and their impact on banking were considered alongside one another to identify potential connections between them. It started with a presentation about the Three Horizons model. Created by International Futures Forum and based on an original model developed by Bill Sharpe, this model is frequently used as a practical tool to plan business strategy.
The model reveals three horizons for transformational change. Horizon 1 represents the current dominant ‘business-as-usual’ scenario: in this case, the conventional energy system dominated by oil and gas. Horizon 3 is a different future, one where desirable change has been achieved, and is the long-term successor to Horizon 1. For example, there is off-grid, decentralised clean energy such as tidal energy. Bridging these is Horizon 2, which represents interventions such as moving further into renewables or a new innovation that has become economically viable within the existing system. These disruptive innovations can either continue to prolong Horizon 1 or pave the way for Horizon 3.
All three Horizons are visible at the same time to varying degrees. The model can be a helpful way to consider which of the Horizons banks are currently financing the most and what is needed to accelerate the transition towards a low-carbon economy. For example, are new financial products and risk models required to finance energy storage?
Framing how we transition from Horizon 1 to 3
Many banks have set net zero ambitions and financed emissions reductions, with a goal to keep lending within a 1.5 degree pathway and to remain within the global carbon budget. Meanwhile, data from the International Energy Agency shows that global carbon emissions continued to rise last year (albeit not as much as feared).
In this case, the starting point and the destination are reasonably well defined for banks regarding the energy system transformation required. The next question is how to support the move through Horizon 2 to Horizon 3 at pace while considering any unintended social consequences and working for a just transition.
One part of the convening focused on framing the questions we ask ourselves along this journey. It is easy to frame financial, social and environmental topics as competing priorities or topics requiring tradeoffs. However, this risks creating an illusion that we must choose between social and environmental goals. Instead, thinking in a non-binary, multifaceted way and examining the multiple connections between issues in more detail could be more helpful in reaching a more holistic understanding.
In the convening, two examples were used. One of the speakers framed the move to renewable energy as being less reliant on oppressive regimes. This took the focus of the discussion from purely the environmental benefits of using renewable energy, of which there are many, towards the human rights considerations. Our second speaker used a framing related to the financial opportunity of energy efficiency, describing refurbishing old buildings to save on heating costs. However, the potential for poor quality building work and the need for appropriate regulations was also noted. In both examples, there are both social and environmental benefits, which can be understood by looking at interconnections in more depth.
What will it take to balance energy security, affordability and sustainability from a bank’s perspective?
Banks have a key role in the low-carbon transition as they finance energy companies, projects and technological innovations. During the convening, there was discussion about how easy it can be for banks to get stuck in a mental model based on what has been successful for them in the past. This can be a barrier to financing new ideas that would accelerate the energy transition, as the risks associated with the transition are not yet well understood.
To move beyond this paradigm and towards Horizon 3 at a faster pace, more experimentation and the acceptance of a different risk appetite is required. New innovations for both the energy and banking systems are here now and will continue to burgeon; this is on all our horizons.
The next CSLL peer learning convening will be held in the second quarter of 2023. In the meantime, if you are a banker actively influencing the climate agenda within your institution, please join the CSLL community and consider applying to the transformative Climate Safe Lending Fellowship leadership development programme, which will open for application in summer 2023.
During the convening, a list of finance and energy-related resources were shared to help support banks on their journey. These are available to readers on request.