A proposal for a greener and more sustainable future of banking
Are socially responsible banks the future? As the transition to net-zero accelerates one thing is becoming painstakingly clear: we are facing a climate emergency that demands collective action and the banking sector will have to play a pivotal role.
As some of the most powerful institutions of the world, with $ trillions of assets under their supervision, banks play a crucial role in allocating financial resources.
While their financial services are still used too often to fund companies and industries that are harmful to the environment, they can also be powerful agents of change.
So how (un)sustainable is the banking sector currently, what alternative banks exist already, and what can be done to make banking more sustainable in the future?
Read on to find out!
1. There is an urgent need for the banking sector to change its status quo and divest from fossil fuels. Major European banks accumulated €532 billion in fossil fuel assets – representing 95% of their total equity – and would struggle to put up with a sudden drop in their value.
2. While many banks have made net-zero pledges, there is a gap between the pledges and the actual strategies, including measures on how to reach net-zero goals.
3. A number of socially responsible banks have introduced innovative business models, including investing in sustainable and socially responsible projects. However, how stringent their sustainability criteria are, varies from bank to bank.
4. The future calls for a “bad bank” structure to manage the downfall of climate-harming industries that provides an alternative to the black and white options of either divesting from fossil fuels or retaining them.
Remember the saying, “every penny counts”? This old adage is not only helpful when you’re trying to save money, but it also applies to the role of finance in tackling climate change.
When it comes to tackling climate change, every penny does truly count. And that doesn’t only include the money you spend on products or your investments – but it starts with the money in your bank account.
At this stage, it is a well-known fact that most banks don’t invest their money in the most environmentally friendly way – in fact, it’s rather the opposite. To be more specific, the world’s largest 60 banks have financed fossil fuels to the tune of $3.8 trillion in the 5 years since the Paris Agreement.
This means that the money in your savings account is most likely invested by your bank into industries that a) you might not support if you support the fight against the climate crisis, and b) you’re not in control of divesting from. Ultimately, this means that your savings, while seemingly lying in your bank account, actually have a footprint – and you’re not in control of reducing it.
Here’s how it works:
By putting money into your savings account, you’re basically lending your bank this money for a very small fee. In the current times of low interest rates, this fee is almost zero. If you save your money at Deutsche Bank, for instance, you get a 0.001% return. In turn, the bank uses this money to re-invest it into different industries to make a profit.
Recently though, the pressure for stricter climate targets has been growing, as campaigners are urging banks to reduce their investments in fossil fuels and disclose more emissions from activities they finance.
Banks across the world have started to realise that their future success depends on their climate-targets today. As a matter of fact, the U.S.' six largest banks – including Wells Fargo, Goldman Sachs, Citigroup, Bank of America, JP Morgan Chase and Morgan Stanley – all committed to net-zero carbon emissions by 2050. Included in this goal are all the bank's operations and also projects and companies they finance.
Additionally, Deutsche Bank announced its goal to facilitate more than 200 billion euros ($244 billion) in sustainable financing and investments, as it tries to counter recent criticism by Greenpeace and Urgewald over its climate targets.
So does this mean the banking sector will finally become green? Not necessarily.
Though on the surface this looks like real progress, these targets aren’t necessarily as ambitious as they may sound.
In fact, fossil fuel financing was even higher in 2020 than it was in 2016. According to the Banking on Climate Chaos 2021 report, investments in fossil fuels are actually growing as the time to tackle the climate crisis is running out.
A new report by the Rousseau Institute, Friends of the Earth France and Reclaim Finance reveals that not only do fossil fuel assets represent a staggering 95% of European banks’ total equity – but these banks would also struggle to put up with a sudden drop in their value. If fossil fuels lost 80% of their value due to rapid green transition, the equity of Deutsche Bank and Commerzbank would almost be fully exhausted.
Looking at these numbers, banks’ pledges don’t really add up with their actions. So let’s sort some substance from thin air: What does net-zero even mean?
In order to be able to reach the Paris Agreement goal and thus limit global warming to 1.5°C, the world will need to stop pumping new greenhouse gases into the atmosphere, by 2050 at the latest. Hence the 2050 “net-zero target”. It implies that any emissions should be balanced by absorbing an equivalent amount from the atmosphere, so that in total they equal zero.
The problem that arises with this net-zero target, however, lies in the “net” part. Some industries, such as coal, for instance, lack low-carbon alternatives, meaning that in order to cancel these emissions out, you would either 1) have to divest from them completely, 2) develop ways to remove their gases from the atmosphere or 3) pay to offset these emissions.
Many companies' net-zero commitments are for a big part based on the last option of offsetting emissions. This involves buying credits in carbon-cutting ventures elsewhere, hoping that the sellers of such credits will use the money to plant trees or develop technology to remove carbon from the atmosphere.
But here’s the truth: It will be impossible to get there just by planting trees.
The problem with carbon offset programs is that, on the one hand, it’s hard to prove how much carbon emissions offset schemes really reduce, and, on the other hand, it’s highly unlikely that such offsets will work on the scale required.
For this reason, companies’ and industries’ net-zero targets require strict monitoring. And yet banks have been slow to elaborate on their net-zero aspirations.
JP Morgan, for instance, says it aligns the most polluting sectors it finances with the “goals of Paris”, but, if you take a closer look, the bank doesn’t have any company-level commitment to reach net-zero by 2050. That is alarming because Scope 3 emissions (indirect emissions arising from the businesses financed by the bank) are the trickiest, yet most important aspect of reaching net-zero goals.
Trusting big banks to achieve their 2050 net-zero pledges may feel like quite a stretch. So which banks can you trust with your money if you don’t want to involuntarily support climate-harming industries?
This is quite tricky due to the fact that terms like "sustainable," "environmentally-friendly" or "ethical investments” are not protected. There are no uniform minimum standards for sustainable investment labels, meaning each bank can decide for themselves how “green” it really is. Only in February, the German consumer protection group filed a lawsuit against DekaBank for misleading clients about the positive effects of its impact equity fund.
For you this means: to find good socially responsible banks you need to dig a little deeper than just looking at the nicest green labels.
In Germany, the consumer advice center (Verbraucherzentrale) makes that quite easy for you. According to their analysis, there are currently 14 banks in Germany that pursue a special business model, based on ethical and ecological criteria. However, only 5 of the 14 banks (as audited in 2020) meet all the sustainability-exclusion criteria defined by the consumer advice center.
The star performer, and one of the best-known sustainable banks, is the GLS Bank. The bank excludes financing in planet-harming industries, such as weapons, coal, biocides and pesticides, genetic engineering, and more. Companies that engage in controversial practices such as violations of human and labor rights are also not included. On the “positive side”, the GLS Bank lists business areas such as nutrition, renewable energy, housing, education, and health.
The strategy seems to be successful: in 2020, the GLS Bank gained around 50.000 new customers. In total, consumers have already entrusted the institute with almost seven billion euros.
The socially responsible bank Triodos – which has been operating in Germany since 2009 – takes up the third place in the ranking, fulfilling 88% of the criteria. The dutch bank has formulated its own detailed guidelines and exclusion criteria for important issues such as climate protection, human rights, and responsible governance. These principles are generally applied in all of the bank's activities, including the projects it finances, as well as its own asset management. Michael Rebmann, PR-Manager at Triodos Bank, has following vision for the future of banking:
“The banking industry needs to move away from 'making' money as quickly as possible and closing its eyes to the consequences. Instead, we need banks that invest in sustainable companies in a targeted manner with a long-term perspective. Banks that look at the social and ecological impact first and then at the financial impact. In the long term, such actions will have a positive impact on financial returns."
MICHAEL REBMANN, PR-MANAGER AT TRIODOS BANK
Giving your money to a green bank, however, sometimes comes with a high price. For instance, a current account at GLS Bank costs €8.80 per month if you’re over 28 years if age, which is significantly more than a current account with other providers.
There is however an exception: the German banking startup Tomorrow claims to invest exclusively in sustainable and socially responsible projects, but their basic current account is nevertheless completely free of charge. The difference though is, that Tomorrow itself does not have its own banking license, but uses the third-party provider Solarisbank.
Tomorrow states that it uses its customers' money exclusively to buy bonds that strictly finance sustainable projects, from expanding renewable energy to the protection of clean drinking water. Elena Stark, Impact Manager at Tomorrow states:
"With 43 exclusion criteria and more than 60 positive criteria, we have developed a comprehensive framework based on the UN SDGs that enables us to evaluate investment opportunities. These criteria range from the exclusion of fossil energy to the promotion of digital education and climate protection. Only if none of the exclusion criteria are significantly violated and at least one of the positive criteria is supported, we present the investment to our Sustainability Advisory Board, which makes the final decision on our investment universe."
ELENA STARK, IMPACT MANAGER AT TOMORROW
So now that you have this valuable information – is it time to ditch fossil fuels, switch to a socially responsible bank and all will be green and good from here on after?
Yes and no. It is unfortunately not quite that easy.
Even though it is true that economies – and with it banks – need to divest from fossil fuels as soon as possible in order to have even the slightest chance to achieve the Paris Agreement goals, there are still some major hurdles to be overcome. Because coal, oil, and gas industries won’t just disappear from one day to the next. As a matter of fact, it will take years to divest from coal and other climate-harming industries.
The inherent problem is, that as the transition to net-zero accelerates, more and more of such assets will become “stranded”. In simple terms: assets that turn out to be worth less than expected as a result of changes associated with the energy transition.
That also implies that these assets (such as coal) will most likely be sold off and left with for instance private owners that are “no good” from a planet perspective. Such new owners or companies may, in fact, try to lengthen the mines’ lives, instead of actively divesting from them.
It is thus argued by industry experts that a different model is needed – so to say a “bad bank” structure to manage the downfall of climate-harming industries. This means a banking structure that provides an alternative to the black and white options of divesting from fossil fuels or retaining them. One with the right funding, transparency, and corporate governance and that recognises that this will be a 15-year process.
It is becoming increasingly obvious that in order to align to the Paris Agreement climate goals, the banking sector will have to change its status quo and start divesting from fossil fuels.
However, there is no denying that fossil fuels will be with us for a while. No matter how much we want them to disappear into thin air immediately – it will take a few years, a significant amount of funding and strict governance for them to go away.
Whatever form such a “bad banking” structure may take – whether it's managed and funded by the European Central Bank or in a different way – it will be needed to successfully transition into a greener future.
But before that happens, what you can do today is become an advocate for change. How? By taking control of your money! Write to your bank and urge them to divest from fossil fuels, do your research and switch to a socially responsible bank.