The crowded trail to a sustainable financial system

The crowded trail to a sustainable financial system

Against a backdrop of summer climate disasters this year, ranging from deadly floods in Germany and Japan, to wildfires in Greece, California and Canada, and unprecedented heat in Europe and the northwest of the U.S., the case for sustainable reform of the financial industry is no longer a marketing opportunity or regulatory chore. It is a business imperative. 

The banking industry is both under rising systemic threat from global warming disasters and uniquely positioned to lead the dramatic international effort to help the world adapt. 

The findings in this Mobiquity report present a stark set of challenges to banking boards and management teams as we approach the COP26 global climate summit in November. Not just in financing the biggest economic transition since the Industrial Age, but in creating the cultural and governance structures to position the financial world to avoid an economic meltdown in parallel with the climate emergency.

It’s clear from the data that the vast majority of banking executives – well over 75% and in the case of the U.S. almost 100% -- see sustainability as a key part of business strategy. What is surprising is that less than a third in the U.S. and Europe see it as a board level priority. While it’s tempting to say Covid has sucked all the air out of the room, the drumbeat of climate disasters this year should be a wake-up call to banking boards worldwide.

Confusion over ESG metrics, outdated cultural structures, and a legacy of fossilfuel lending that ties many banks to the oil and gas companies in uncomfortable but unavoidable ways were all cited as reasons for hesitancy. While all true, the digital transition of many banks, particularly in Europe, is a big advantage they should all take to drive sustainable outcomes across products, staffs and borrowers. 

The banking sector is a leader in digital transitions. Most of us bank online or on our phone apps these days. Credit and debit cards can be tapped instead of swiped; privacy gains in particular have given banks a leg up on other industries. The lending books of many banks are rapidly changing as well, with green bonds, green loans and other green financings rising rapidly around the world, particularly again in Europe, where even the European Central Bank is evolving a green lending policy. 

One of the surprising aspects of the Mobiquity report is the level of importance granted to ESG and sustainable practices in U.S. banks, which are far behind levels of green business and digitization being done by their counterparts in the UK, Germany, and the Netherlands, as well as France. It is attributed to more exposure to climate media and public discussion, which may be true, but it is surprising nonetheless given the fact that Europe is driving the climate finance discussion. 

Of all the challenges facing the banking industry this report points out, however, none are greater than reconciling promises of net-zero emissions at Scope 1, 2 and 3 levels with the fossil fuel assets on loan books. Those assets represent not just a hindrance to greater shareholder approval and staff retention, but a dangerous climate timebomb on loan books should they be stranded as climate conditions deteriorate rapidly (which they are). 

To address the systemic challenges these assets represent, the digital opportunities to improve underlying businesses, and the overall responsibility of the banking system toward driving the economic transition to a renewable, sustainable economies, banks must prioritize climate change and ESG in their boardrooms, across their management teams, and in every department and geo-graphic location. 

This report makes it clear both where the early successes lie and the hard work that is to come, country by country, bank by bank. It is a useful guidepost on a crowded trail to a sustainable financial system.

Written by: David Callaway

David Callaway is the Founder and Editor-in-Chief of Callaway Climate Insights. David is the former president of the World Editors Forum, Editor-in-Chief of USA Today and MarketWatch, and CEO of TheStreet Inc.