Blair Bateson
The global transition to a low-carbon economy is not just about managing risk – it’s a massive commercial opportunity for banks. In 2023, environmentally friendly financings generated around $3 billion in fees, surpassing those earned from issuing fossil fuel debt for the second year in a row. This shift signals a pivotal moment for the financial sector to help reshape the global economy and position their institutions as industry leaders.
Banks of all sizes and levels of sophistication can capitalize on this transition. However, to fully leverage these many opportunities, financial institutions must take strategic steps to prime their organizations. Here are suggestions for financial institutions to consider.
First, financial intuitions can start by leveraging their existing strengths and core competencies. For example, banks could expand lending in industry sectors they already specialize in by adding low emissions borrowers to their current portfolios. For instance, if they lend to the power and utilities industries, they could expand their portfolio to include renewable power generation borrowers. Banks that have already brought on low-emissions-intensity borrowers can branch out further by lending to new borrowers in related sub-industries.
Holly Li
Invest in Staff, Borrower Data
Second, investing in staff training on climate risk and sustainability topics will give banks the expertise needed to actively engage clients with new products and services.
Regular staff capacity building topics can include creating or promoting sustainability-themed financial products, encouraging and educating clients on climate solutions financing – such as green bonds – and taking advantage of opportunities like the Inflation Reduction Act. That federal law is driving hundreds of billions of dollars in private investment for clean technologies and infrastructure.
Recommended training includes, but not limited to, the Building Board Expertise on Sustainability from the University of Michigan’s Ross School of Business, the Principles for Responsible Banking Academy (PRB Academy) from the United Nations Environment Program and the Task Force on Climate-Related Financial Disclosures’ several Knowledge Hub online courses.
Third, collecting and analyzing borrower emissions data is a critical component of client engagement. This information will be vital as banks begin assessing climate risks and evaluating the progress the clients they are lending to are making (or not) in the transition to a low-carbon economy. Collecting and understanding this data at a sector level will aid banks as they develop tailored products for their borrowers.
Help Make Positive Change
Last but not least, banks need to advocate for policies that support continued investments in low-carbon technology to fully leverage the unprecedented economic opportunities that arise from the transition.
A recent analysis released last year from Ceres found that while 92 percent of banks stating support for climate action, less than half (38 percent) have publicly and directly advocated for Paris-aligned climate policies in the last three years. Banks should promote policies that reduce climate-related risks to the financial system, including standardized climate risk disclosure and proper regulatory oversight.
This extends to lobbying done as part of a trade association. Banks must hold their trade groups accountable and ensure that their lobbying practices are aligned with the institution’s climate goals. Alarmingly, 92 percent of banks have lobbied against or pushed back on climate policies, often through industry groups, undermining their stated climate goals. This misalignment between direct statements and indirect actions threatens to derail progress and exposes banks to reputational risks.
Some institutions are leading the way in positive advocacy. For instance, in 2022, Calvert Research and Management (part of Morgan Stanley) provided comments to the U.S. Environmental Protection Agency in favor of strengthening the agencies’ proposed standards on methane regulation, a cost-effective way for the oil and gas industry to reduce emissions, given the low cost of compliance. In 2022, Citi, Bank of America and Wells Fargo submitted comment letters in support of the U.S. Securities and Exchange Commission’s climate disclosure rule. While the banks did not support every provision within the rule, their direct engagement in the rulemaking process was positive.
The transition to a low-carbon economy offers banks an unparalleled opportunity to lead global finance into a sustainable future. By embracing climate financing, innovating products and advocating for supportive policies, financial institutions can drive profits while becoming industry leaders in the low-carbon transition. Those decisive enough to seize this moment will secure their own success and support the creation of a cleaner, more prosperous global economy.
Blair Bateson is the director of financial services for the Company Network at Ceres. Holly Li is the program director of net zero finance for the Boston-based Ceres Accelerator for Sustainable Capital Markets.
