The Bottom Line of Green Banking: Part I
Why does Union Bank have a substantial dedicated environmental stewardship team? Why has Citibank pledged to invest $50 billion in climate change solutions? Why does Bank of America offer a Visa card with points that support The Nature Conservancy? This is the first in a four part series covering environmental sustainability for banks.
Why look at environmental sustainability for banks? At first blush, it may be tough to see how this issue relates to the financial services sector. Banks do not operate factories or power plants which release pollutants into the air, nor do their supply chains require huge amounts of raw materials with large environmental footprints. In fact, the perceived sum of a bank’s impacts might seem to be simply the resources used in their administrative offices, retail branch locations, and IT facilities.
We’ve heard the joke that money is already green; a bank’s environmental program requires only a few recycling bins, offering customers paperless billing, and having a reserved parking space for hybrid vehicles. Or does it? Actually, environmental issues ranging from climate change, to pollution abatement, to how to finance new energy are crucial challenges facing the financial services sector. Banks provide capital to nearly all sectors of the economy and as environmental sustainability issues increasingly affect more businesses, they will similarly impact lending decisions, underwriting criteria, stakeholder relations, facilities and supply chain management and brand differentiation.
In many cases, “going green” represents a major opportunity. A recent study by Accenture and Barclays identified a capital requirement of over €2.9 trillion for the developed world to collectively transition to a low carbon business model through investments such as smarter electrical generation, greener buildings and cleaner transportation infrastructure (Carbon Capital: Financing the Low Carbon Economy). At the same time, environmental issues represent a distinct and growing risk which must be understood and mitigated. The United Nations Environmental Programme has estimated that lost value, as a result of climate change, could total $1 trillion annually by 2040—a frightening figure for banks that finance vulnerable assets (Insuring for Sustainability).
Leading banks are already addressing the opportunities and risks stemming from evolving environmental dynamics. To be clear, doing so is not philanthropy: it is corporate strategy. HSBC Holdings recently stated, “[We consider] climate change to be a long-term influencing factor in the development of group strategy. This is both because of the potential for climate change to disrupt our own activities and those of our clients and also because the shift to a low-carbon economy requires finance which presents an opportunity to HSBC.” (CDP 2010 Financials Sector Report)
Like HSBC, many banks understand that they must carefully weigh the risks and skillfully harness the opportunities of financing a greener future. Sustainability has been closely correlated with stronger financial performance. An iconic study by strategy firm A.T. Kearny looked at bank performance during the global economic crisis of 2008-2009 and found that financial services providers focused on environmental sustainability outperformed their peers by 25% in terms of their market capitalization over a 6 month period. Any financial institution that wants to follow this good example must begin, as with any business endeavor, by defining a strategy.
An important first step is examining the reasons why banks consider environmental issues to be a matter of strategy, the actions being taken, and the benefits realized. This leads to a deeper understanding of the opportunities inherent in financing a greener future, new approaches to risk management, and cost-saving benefits of cutting environmental footprints both inside and outside a bank’s walls.
So what makes a comprehensive environmental strategy for a bank? There are several key components:
- Green Lending
- Environmental Underwriting Criteria
- Green Operational Programs
Over the course of this series, I will detail how leading banks and their smaller peers are already leveraging these components to boost their bottom line and reduce exposure to risk.
Andrew Malk is the Founder and Managing Partner of Malk Sustainability Partners (MSP), a specialty management consultancy, which guides forward-thinking businesses around the world to profit from operating in better balance with the environment. MSP has particular expertise in serving the financial services sector.
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