How Bank can play a positive role in climate change

In the past couple of days, global world leaders have been gathering at the United Nations Climate Change Conference (COP27) in Sharm El Sheikh in Egypt discussing actions toward achieving the world’s collective climate goals that were agreed upon under the Paris Agreement in 2015.

The key theme of COP27 is turning pledges into implementation with finance taking a centre stage in mobilizing required resources to support the mitigation and adaptation actions that will address climate change. During the conference, U.N. experts published a list of projects worth $120 billion for banks, investors, and insurers to fund and thus support countries cut emissions and mitigate global warming.

But there are a variety of ways banks can play a positive role in climate change. Based on our experience working with industry leaders in sustainable finance, we have outlined how banks can support economies in achieving climate goals while at the same time building a strong and sustainable business.

The Role of Banks in Climate Change

Increasing consumer awareness and momentum around the climate crisis urges banks to understand the role they have in making a positive change on the environment and their customers. Banks have to take responsibility and address climate issues at hand, for example by funding the required change to society.

Banks need to act boldly much as they did during the Covid-19 pandemic in which they showed flexibility and adaptability to a new status quo as well as a true commitment to helping consumers in mental and financial distress.

In a climate context, this means that banks need to take their actions beyond the initial scope of ESG practices (‘Environmental, Social, and Governance), expanding to the core of the bank’s operations. For example, developing a net-zero emissions balance sheet by offsetting the carbon footprint by financing the world’s transition to green energy, stimulating clients to opt for sustainable solutions via the bank’s financing mechanisms or providing customers with insights into their personal carbon footprint and helping them to invest into a more sustainable future. While the industry is still figuring out the best approach to take, assuming your role as a bank and doing more is only a positive thing.

Embedding Sustainability in Banking

With banks playing a vital role in climate change and customers’ attention and loyalty to ESG criteria increasing, it is essential for banks to define a forward-looking sustainability agenda. Such agendas should address both social and environmental challenges and implement ESG measures throughout their organization.

But before taking on specific initiatives across the bank, ESG should first be embedded holistically across the banking organization. This starts by measuring the impact the bank is having on global sustainable development goals and defining clear targets, supporting universal initiatives such the Paris Agreement and assisting implementation initiatives as outlined during this year’s COP27. Consequently, banks need to translate these targets into strategies, action plans and key performance indicators (KPIs) for the business, for instance, into specific policies for the risk department, corporate lending etc.

Being able to measure the bank's impact and define targets that are in line with global development goals requires building up expertise, getting the right people and the right skills on board with the knowledge to handle data and setting processes in place to identify target goals, translate them into KPIs and subsequently implement measure across the bank.

Implementing Green Practices across the Organization

With clear targets and KPIs in place, the bank should begin to adopt green practices across the entire organization. We have identified 3 key areas in which banks can act and implement sustainable measures.

Reducing the bank’s own ecological footprint: As a baseline, banks need to operate in a sustainable way and reduce their own carbon footprint, for example, by sourcing renewable energy for buildings, reducing the use of paper in the operations, or outsourcing energy-intensive technology infrastructure.
Funding the energy transition: The biggest impact, however, can be achieved via financing activities, for example, decarbonizing loan portfolios by investing in ventures such as reforestation and wind energy, next to initiatives that make grey sectors more sustainable.
Helping consumers to adopt sustainable practices: Sustainability can be embedded into products via offering loyalty points that incentivize a low-carbon lifestyle, tailoring loans for sustainable products (e.g., hybrid cars, low-carbon farming, green mortgages), or starting to issue green bonds.

What approach to take, where to invest and which initiatives to undertake, ultimately is a question of strategy and depends on a variety of factors. Most importantly however, is for banks to take action now, not only to preserve the trust of customers but also to mitigate transition risk, for example from lending to carbon intensive industries

To find out how your organization can tackle the climate crisis and become part of the solution contact us directly at info@fincog.nl so we can provide you with dedicated support.

How can Banks play a positive role in climate change

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