..banks operating in banking as usual are looking for policy and regulation to lead them but arguably, if you could change one industry, it would the financial industry because it is so integrated with the rest of the corporate world.
Governments talk about net-zero targets by 2050, and activists like Fridays For Future and Extinction Rebellion are calling for a transition to a low carbon economy by 2025 - 2030.
Civil society, policymakers and industry are the key drivers of societal change and underpinning and interacting with all of these is the financial system.
A new report, Bank 2030: Accelerating the Transition To A Low-Carbon Economy', produced by the Cambridge Institute for Sustainability Leadership (CISL), analyses the banking sector and identifies strategies for accelerating the transition to a low-carbon economy as opposed to a more passive approach, including pursuing short-term objectives over long-term survival.
Report co-author Nina Seega explains what the obstacles to transition are and why it is critical that banks begin the process of change immediately.
Nina Seega (NS): I think there are a couple of things. One is that if you look at the banks that sit across the more passive mindset, they use the language that they are client-led and that they are transaction-driven so that they don’t have enough time to devote to understanding these topics. So some of it is around the focus on efficiency and some of it is around sustainability as a reputational concern rather than as a strategic imperative.
So, in the conversations, we have had where interesting work has been done or pioneering practices are being developed, very often the bankers have gone through the process of understanding what this is about, seeing sustainability as not just something to be added on the side but as a core thing that you have to embed in the day to day business.
I think the biggest issue is thinking that we are going to transition as an economy; the question is, how can we foster that transition? Part of it is about capacity, in terms of having the understanding, having the proper correct training, correct education. Some of it is around structure, [especially] if you are constantly chasing transactions.
There were some very interesting quotes [from bankers] in the report. Even Green Bonds which are relatively mainstream right now, take more time to push through the market by comparison with the normal bond and if you are one of those trying to achieve efficiency then you go for the easier transaction.
So there are many issues. Some of them are structural in the way stuff is done and some of them are about not quite being on top of the agenda.
The other thing I thought was interesting is that when we talk about the bankers and banking, it is not as if they are not doing anything. They will still be financing renewables. They might still have exclusion policies and they might still have commitments to financing low carbon, we see that as a banking as usual characteristic.
NB: Are you saying that this is safe investing and that they need to increase their risk?
NS: Part of it is about that but I don’t think it is just about that. If you go back all the way out to the end of the report, some of the stuff that we are talking about is extending the banks business and operational remit. That is innovative, funky and interesting.
However, some of the stuff we are talking about is actually staying very much within the core financing model but just looking somewhere beyond what we are currently financing.
So stepping outside of the usual renewables and asking ‘how can we fund hard-to-abate sectors, how can we fund the transition of the hard-to-abate sectors?’
A good example is the news that the steelmaker SSAB will bring CO2 free steel onto the market by 2026. So effectively it is looking at how can we facilitate that?
The second part which I think fits very well within the core function of a bank as an intermediary, as an organisation that holds the relationship, is this idea that we can work much closer with clients to bring this transition. It is this triangle where we bring the client together with experts.
NB: Is there a part of this where you are being asked to pay more today to be compliant with the goals of the Paris Agreement?
NS: I think that is a question that gets asked a lot here, how much is it going to cost us to transition and there somewhere is the brighter future?
I actually think we need to turn that question on its head and ask, what is the cost of not transitioning? We need to start talking about the cost of inaction.
If you look, for example, at the Green Finance Strategy released in the summer, it was the first time when I have actually seen numbers in a mainstream government policy quantifying that. So if you look at the cost in the UK of not complying with emission reductions in population health, it is £1.7bn per year by 2020 and £5.3bn a year by 2030.
I think we all need to switch the conversation away from ‘let's invest now for the brighter future’ into ‘if we don’t invest now for the brighter future, what is it going to mean for us?’
So, for the main question that you asked me, the answer is yes, you have to invest a little upfront in capacity building, in building the client relationships, and in allowing your front office people to build these types of innovative products that will allow your clients to transition.
NB: In this idea of the cost of not transitioning we are getting into risk. One of the key factors here is the timeframe we have to transition. There is a lot of noise now from institutions saying that they understand now that it is time to transition but the risk is that they slip backwards because they don’t know what to do. What would be your advice to them?
NS: I completely agree that there is a huge amount of momentum in the market. The question of whether the banks are actually moving is a more difficult question but I think that we are seeing the leaders move quite quickly and we are now seeing a lot more of the rest of the banking sector suddenly starting to perk up and say, wait a minute, what is it that I am missing?
I think this is key. You heard what Black Rock have said and yes, you can have a conversation whether that is just a statement or whether that is going to backed by action, but it has major signalling power.
NB: Part of that signalling which you mention in the report is that you can either shape the future or be shaped by it. Can you talk a bit about how the bank can become a shaper?
NS: If you start working with your clients right now, if you start helping them to transition their practices then ultimately you are the one who will be financing the sustainable client of the future. I think if the banking sector is sitting there and saying, ‘No, no we are client-led and our clients are not asking for this’ then those banks are going to be left sitting on the risk.
There is no doubt in my head that the environmental source of risk that we have seen are existent in our current financial portfolios. That is where we see for example a huge movement by the financial regulators. If you look at the Bank of England and their drive to stress test financial portfolios by both the banks and the insurance companies and to actually elucidate some of the assumptions that are inherent in the system, about what both types of actors are going to be doing.
So, if you are investing right now, and we are talking a little bit here about the risk angle and having an effective risk management function who is taking strides to quantify these types of risk and supporting the front office, is key.
We put this report together because we wanted to bring attention into the opportunity space. We wanted to say that this is not just a risk issue, there is plenty of interesting stuff that needs to be funded, where we would really like the financial sector to step in.
Quite interestingly, we have a number of conversations with corperates and with financiers, and quite often financiers would like to go outside of their renewables box but they are not aware of the wider opportunities. Corporates have a slightly different view where they seem to have trouble with finding financing.
But we still want to make sure the risk point comes across because risk is a fundamental way to influence the cost of capital. So, if you are properly measuring and managing environmental sources of risk in mainstream financial risks frameworks, then by default the cost of going brown becomes more expensive. So we had to put this in but the main emphasis of the report is on the opportunity side.
NB: There seem to be voices, especially at conferences like the UN COP, that talk about opening the floodgates of the low carbon economy. When you look through the main sectors, are you confident that this is real, that if you get the momentum going then there is a bright investment future?
NS: I think if we can get the financial system to move, then I think it will be absolutely fantastic!
To be completely honest with you, when we talk about transition, we often talk about policy-based transition, or technology-based transition, or sentiment-based transition, and a lot of people, and especially the banks operating in banking as usual are looking for policy and regulation to lead them but arguably, if you could change one industry, it would the financial industry because it is so integrated with the rest of the corporate world.
If we can get the capital moving in the financial industry, to me, that will spur the transition to the sustainable economy. It will spur the innovation that we need. It will help the diffusion of that innovation.
Nick Breeze is a climate change journalist & interviewer, an organiser of The Cambridge Climate Lecture Series, as well as writing on Envisionation.co.uk and SecretSommelier.com - follow on Twitter at @NickGBreeze.
Dr Nina Seega is research director for sustainable finance at the Cambridge Institute for Sustainability Leadership (CISL).