As the 2023 Climate Safe Lending Fellowship moves into its concluding phase, Sustainable Banking Advisor Rebecca Self reflects on the state of sustainable finance today, highlighting new survey results, and asks how the inevitable shift towards the low-carbon economy can be accelerated.
We recently surveyed the Climate Safe Learning Lab community of bankers and participants in the Climate Safe Lending Fellowship, all of whom are accelerating climate action within their banks, about the state of sustainable finance in banks today – are ambition levels high enough and what are the barriers and enablers to a low-carbon transition at banks? In this blog, we start to explore two of the themes that emerged: the role of technical guidance and barriers to climate finance. More detail on these issues will be published in an Insights Report in September 2023.
A complex and evolving picture for sustainable finance in banks today
For context, first we must acknowledge that the world is on the brink of a polycrisis. Banks face increasing physical and transition risks (and opportunities) related to climate change, while operating alongside major social problems and in a complex geopolitical environment. Collective initiatives seeking progress on net zero, such as the Glasgow Financial Alliance for Net Zero (GFANZ), are faltering. More positively, bank financing for clean energy is accelerating, in particular solar power. However, for every one dollar of fossil fuel finance, only 81 cents are supplied to clean energy by banks; this ratio needs to shift to 4:1 clean energy to fossil fuels to reach net zero emissions by 2050.
We carried out an anonymised survey of 30 respondents, all of whom work within banks internationally in a range of roles, to provide additional insights into the question of sustainability in banking today. Not a single respondent thought the banking sector as a whole was doing enough to keep warming to within 1.5 degrees globally and close to 90% did not think their own bank was doing enough. So, why is this the case and what can be done?
Barriers and enablers to progress
The survey asked respondents to rank a range of different topics on a scale of 1 to 5, with 1 indicating a strong barrier to climate-aligned finance at banks and 5 indicating a strong enabler.
Two emerging themes deserve particular attention. First is the role of technical guidance. Over the past decade, important work has been done to improve the calculation and disclosures of financed emissions: for example, identifying Scope 3 emissions and creating science-based standards and methodologies to measure a bank’s alignment with a 1.5-degree warming scenario.
While this technical guidance is incredibly important, 87% of the survey respondents stated the required low-carbon transformation depends primarily on making cultural and behavioural changes within banking. This includes, for example, adopting new mindsets and approaches to working with clients, such as conducting internal climate training, utilising new risk questionnaires to assess progress on the transition and asking long-term strategic questions.
The second theme was barriers to climate-aligned finance. The top five departments or areas that respondents agreed are barriers are:
On a more positive note, the top five departments or areas respondents agreed or strongly agreed are enablers to climate-aligned finance are:
These results suggest that the majority of the barriers to climate-aligned finance are internally-facing teams, whereas the enablers are mostly externally-facing teams.
This may be where action gaps exist: for example, the gap between earnestly made external commitments to stakeholders outside banks and the practical reality of how these changes are implemented internally.
Lessons for sustainable finance from financial crime compliance
Implementing sustainable finance can feel like an overwhelming challenge due to the technical requirements, such as data, technology and disclosures, combined with the necessary deeper cultural changes. However, there are precedents we can learn from. A small parallel can be drawn with financial crime compliance, for example.
Banks implement operational checks on criminal activity, such as money laundering and sanctions violations. Tier 1 banks spend US$1 billion per year on average on compliance to avoid the threat of losing their banking licence and being hit with regulatory fines, which have amounted to US$28 billion since 2008.
Perhaps lessons from the implementation of financial crime compliance at banks can be transferred to climate action. Should banks now disclose the amount they are spending on the implementation of their climate transition? And what should be the regulatory and financial threats of non-compliance on climate?
In conclusion
If we are to raise ambition and change the state of sustainability in banking, institutions will need to prioritise behavioural and mindset changes. This is because the current barriers appear to be primarily internal, while there are external factors that help to accelerate progress. Though the task can appear vast, there are precedents in banking we can learn from.
This blog is a taster of the findings that will be published in an Insights report and accompanying webinar launched during New York Climate Week in September 2023. The publication and event will explore what can be done to address barriers and enablers to climate action inside banks, and suggest practical ideas to accelerate action. If you would like to be contacted about this report and webinar, please register your interest.
The Finance Innovation Lab is delighted to be participating in London Climate Action Week with a reception for bankers to discuss these initial insights about barriers and enablers on Wednesday 28 June 2023.