Sustainable and Finance are not supposed to be disconnected concepts for most banks and their corporate customers these days. However, financial institutions have had varying levels of success putting the two words together and in action in relationships and lending practices with their business clients.

This is important, because, as stated in a Bloomberg headline story  from a couple of years ago, investing, lending, and underwriting activities by banks are responsible for dramatically more Greenhouse Gas (GHG) emissions to harm the environment than those they produce and report from within their own operations.

Finextra has covered sustainable financing issues and industry activities and announcements extensively since the term was coined, and it’s a co-sponsor of this year’s Sustainable Finance Live conference, coming on the 6th of October to London. The sixth-annual event, including a Hackathon bringing together practitioners from many areas and firms to propose solutions for “Financing Sustainable Cities” (this year’s theme), will be a must-attend for banking and sustainability leaders from throughout the UK and Europe.

What is the disconnect between climate promises and  reality

Bank performance vs. promises made in this sector is an issue that (like the climate) is hotter than ever. In fact, Boston-based and globally prominent nonprofit Ceres – on the forefront of corporate climate change advocacy for more than 34 years - points out in a report released late last month (Responsible Policy Engagement Benchmarking for Banks), that financial institutions have both made strides in some areas of environmental and social awareness and action and disappointingly underachieved their promises made in others.

However, it’s not for lack of understanding or making commitments, because of the top thirteen major US financial institutions (measured by market capitalisation) in the Ceres study:

• 100% of the banks publicly acknowledge the reality of climate change and the need for policies to address climate risk and meet U.S. emissions reduction goals;   

• 12 out of 13 of the banks have set net zero targets by 2050
• A majority of these institutions have been advocates for stronger actions by businesses to confront climate change across the globe, as 69% of banks have lobbied in favour of Paris-aligned climate policies in the last three years, either individually or as part of a coalition

One notable inconsistency in the Ceres report does highlight some confusion related to true intent by financial institutions, as its charts and discussions illustrate that 75% of the banks analysed lobbied both for and against Paris-aligned policies, highlighting the banks’ conflicting approach to climate policy engagement.   

Why banks face growing scrutiny to stand behind their marketing claims

Many organisations and publications continue to focus major attention on this topic, sharing periodic updates on the status of major financial entities’ sustainable investing pronouncements vs. their realities in the marketplace. They have reserved extra scrutiny for holding corporations and especially banks regarding the promises they’ve made - to reduce their GHG emissions, to comply with leading reporting standards for environmental, social, and governance (ESG) practices, and to actively encourage their corporate customers to do the same. Essentially, many observers (and increasingly, industry regulators)

are challenging banks to prove that they are “walking the talk” of their climate and ‘better business’ commitments in real-time, and with demonstrated actions.

How Ceres drives sustainable business focus and outreach from banks to business clients

Ceres’s “Company Network” is a key element of the nonprofit’s advocacy and action strategy - focused in the capital markets and financial arenas - to urge businesses to understand and proactively adapt their practices to be more climate-friendly and socially-progressive. Ceres has been a force in confronting the perils of climate change since the organisation was formed by concerned investors, environmentalists and public policy authorities after the Exxon Valdez oil spill disaster in Alaska in 1989.

One of the most active communities among Ceres’s multi-faceted collection of industry and policy groups and individuals dedicated to an equitable, sustainable future, this community, described by the organisation as including “major corporations committed to driving sustainable business leadership by taking action to stabilise the climate, protect water and natural resources, and build a just and inclusive economy” is headed up by program director, Dan Saccardi.

Finextra reached out to Saccardi and his colleague and director Blair Bateson, CFA, to weigh-in on the current state of sustainable finance. That is, the story behind the pronouncements of support for socially responsible and renewable companies and products made by banks as well as the facts and performance benchmarks contained in Ceres reports. We want to get a clear view on where their organisation believes the industry has made progress vs. where it needs to be for global climate and social prosperity goals to be achieved.

“I think the answer is that they (banks) are doing a lot and they've been moving in meaningful ways for the past several years. At the same time, (in terms of) the level of ambition that we're looking for them to achieve, there still remains a lot of progress to be made,” says Saccardi. He explains that it’s not a simple challenge, because: “they're your multi-trillion-dollar companies that are really at the heart of the economy […] and it's not simply their own businesses, but they are enabling the economy both as we know it, and as we hope to see it transform in the coming years. And it's a very complicated environment that they're working in.”

As Saccardi and Bateson explain, banks first came onboard a few years ago with addressing climate change impacts by setting broad goals to achieve Net Zero emissions [defined as reducing greenhouse gas emissions within their purview to the point that any ongoing emissions are balanced by removals] within a certain number of years, typically by 2050. Initial commitments made by banks and other businesses to reach these targets, they state, are now starting to be fine-tuned with interim targets for 2030. That’s because most scientists agree with the United Nations 2015 (COP 21 Paris conference) treaty on climate change assertion that greenhouse gas emissions must peak before 2025 at the latest and decline 43% by 2030 – to achieve a critical milestone toward keeping global temperature increases of 1.5 degrees celsius or less above pre-industrial levels before reaching the end of this century.

Why lending habits are slow to change across the board

While clarifying and in some cases, expanding their promises to reduce their own emissions, banks have also begun aiming at the most prominent emitters among their corporate customer ranks, such as fossil fuel producers, construction industries, and agricultural firms. Some have actively exited or refrained from extending lending agreements with clients in more environmentally-adverse industries. However, progress, even for those institutions which have proclaimed their intentions to only finance and support (through cash management, trade, investment banking and other services) ‘clean’ industry customers, has been slower than hoped, or substantially lagged the banks’ own commitments and timelines.

Now, Saccardi says, banks are “beginning to expand” their “sectoral guidance,” as he called it to more of their business clients, “across asset classes beyond just their lending.” Yet, more is needed to achieve Net Zero targets and other environmental milestones. “We put that under the category of necessary but not sufficient, at the end of the day […] real economy emissions reduction […] that’s where progress still needs to be made.”

Why are banks, and not just many of the top 13 or 20 or 100 in any given country or region, falling so short on their climate change commitments, as they’ve been accused of doing by watchdogs on most sides of the issue? “That's a great question,” says Saccardi. “I think we've seen different approaches. Some institutions have set things like a 2050 Net Zero target without having the full roadmap to get there because it's very complex and others are taking the approach of ‘We need to have a clear line of sight into each of the sectors that we're trying to decarbonize before we put out a sectoral goal.’ We (Ceres) see the merit in setting the ’marker in the sand’ because that helps organise the institution and rally the institution to then do the analysis that can help backfill the plan to get there […]  but some institutions are hesitant to make too bold a claim unless they have a very clear path to get there.”

Is pressure mounting on banks to act quickly on climate commitments?

Whatever the reasons for various bank delays, the time for workable and firm transition plans for not just banks, but their business customers, is now, according to Ceres. “I think the reality is we want and expect the sector to move more quickly because in order to, again, achieve the real (broad-based) economy (GHG emissions) reductions that they need to by 2030, we need to start bending those curves,” asserts Saccardi.

What about some of the more pointed attacks levelled at US and other banks for climate change inaction? These include accusations of ‘greenwashing,’ where progress toward climate change or other environmental goals is trumpeted  through marketing, advertising, or other media channels, while failing to follow through on demonstrable actions to achieve such promises. These accusation are levelled against many top banks by organisations such as the Rainforest Action Network, Sierra Club, prominent responsible investment advisors, and other activist groups.

Even some very well-known corporations with clearly-defined climate action and transition plans in place have been targeted in the press for banking with institutions deemed weak or negative influences on efforts to decarbonise business, or providing mixed signals on their true intent or commitment to the cause as evidenced by their actions in the marketplace.

“Something we're laser focused on,” says Ceres’ Saccardi, flipping the question from targeting ‘bad guys’ in either the banks or their client base to strongly encouraging positive behaviour, is “‘What are the real-world impacts’? Our perspective is less about moving away from companies and more about how can banks bring companies along in the transition? And that's obviously a challenging task, because as you mentioned, if you push too hard, you push them away, but if you don't push hard enough, you're not achieving business transformation. And that's a balance that we're very much focused on in the realm of client engagement. Something we're working with the banks on is how do they engage these clients such that they're asking the tough questions of them?”

Why now is the time to create and execute effective climate transition plans

As Ceres and several partners, including We Mean Business Coalition, CDP (formerly Carbon Disclosure Project, and Environmental Defense Fund assert in a joint publication, Climate Transition Action Plans - CTAPS, a major objective now being emphasised to help the world to meet critically important environmental action targets is for companies to prepare carefully-conceived, well-designed and workable climate transition plans.

As Saccardi points out, that’s the ‘crucible’ where many of these tough questions get answered, decisions to decarbonise operations and supply chains are made, and other quandaries and challenges relating to running a cleaner, more earth and humanity-friendly business are tackled and embraced - instead of being ignored or ‘kicked down the road’ in lieu of what the company may have deemed more pressing priorities. Banks, their lending relationship managers, their treasury management teams, in fact all of the staff within the institution from top to bottom must, he said, play crucial roles here.

“Do the clients themselves have their own transition plans? Do they have their own pathways to decarbonise? If the answers are ’Yes,’ then they should absolutely continue and even double down with how they're working with them.  If the answers are “No”, that's when we think they should be asking the hard questions of themselves: Is this a company we can in the long term continue to do business with?”

Next from Finextra: Part 2 of our Ceres interview – Regional financial institutions and smaller companies enter the climate transition picture