What role for banks in financing a green transition?
and what is unique about Triodos to approach this?
KEES VENDRIK, CHIEF ECONOMIST, TRIODOS BANK
International and collective action is needed to make the transition to a more sustainable world a reality. A key factor in this are the goals of the Paris Climate Agreement. In 2015, this landmark agreement signalled the global community’s commitment to combat climate change. It promised to bring all nations into a common cause. It was ambitious, timely and arguably maps our last chance to transition to the sort of future most of us would want future generations to inherit.
Many countries are working hard to address climate change with concrete plans – the Dutch ‘climate agreement’ is one example of an effort to reach a consensus, across a number of industries, on what it will take to reduce the national carbon footprint far and fast enough to deliver on its contribution to the Paris climate goals. But these efforts, wherever they happen, are often fraught with challenges; from competing political and commercial self-interest, to inertia in the face of what can seem like an insurmountable global challenge.
The financial sector has a crucial role to encourage and stimulate others to take the right steps to tackle climate change. After all, the decisions a financial institution makes about who it lends to and invests in dictate the impact it makes on the wider world – for good, or ill. We believe money can be a force of good.
Increasing momentum for change
There are about 25,000 banks worldwide: how responsible are they right now? And how does their concept of responsibility compare to the people who are impacted by their financial decisions? Whilst a few are advancing quickly in their sustainable impact, others are only at the cusp of understanding and integrating environmental sustainability or social purpose.
One of the biggest impacts the sector can have is to help decarbonise our economy to limit global warming to 1.5 degrees Celcius. That’s why an initiative announced by a group of front-running Dutch financial institutions, during the Paris meeting, is so important. These institutions, led by Dutch bank ASN, called on the negotiators at the Paris Climate Summit in 2015 to take on board the role that investors and financial institutions can play to deliver the radical shift we need to a low carbon economy.
More practically, the group committed to create a more transparent approach to assessing the greenhouse gas emissions of their loans and investments, for stakeholders inside and outside the Dutch financial industry. The group created the Platform for Carbon Accounting Financials (PCAF). It was the world’s first effort of its kind, by the financial industry, for the financial industry.
Until recently, many financial institutions and businesses more widely, considered taking care of the footprint of their own operations was enough to meet their environmental obligations. Behaving responsibly as an institution, through the choices you make about how to reduce energy use, source energy sustainably, and limit business travel, for example, is important. But it plays a relatively insignificant role in the overall footprint of most financial institutions.
Accounting for the carbon emissions of loans and investments creates many and varied benefits for the institutions that do it. Banks, and the sector more broadly, can monitor their greenhouse gas emissions, create opportunities for comparison between institutions and be more accountable and transparent to their stakeholders. Ultimately, they can use this information to set climate targets and steer investments towards a low-carbon economy.
This methodology, which already exists in a similar form for many other sectors, will allow financial institutions to set ‘science based targets’ and create a clearly defined pathway that specifies how much and how quickly they need to reduce their greenhouse gas emissions to meet the Paris Climate Goals. The members of PCAF are co-sponsors of this work and closely connected to its development because they believe that banks should play their part in the transition to a low carbon economy of the future.
Method in the madness
PCAF requires institutions to account for the footprint of their own emissions. It’s important to show stakeholders that you are ‘walking the talk’ while recognising that in most cases the contribution of your operation’s footprint to your overall emissions, will be relatively small. Frameworks like these demand exploring what you can do to make the biggest difference to serve society, target-setting and accountability; all of which, in the climate change realm, benefit from accounting for an institution’s greenhouse gas emissions.
They also require a responsible approach if they’re to succeed. They must be genuinely international to ultimately avoid ‘dirty’ sectors being excluded and left to non-banks in parts of the world which are hard to reach. Frameworks also should be linked to balance sheets and financial performance, including risk assessments. And it should be clear to stakeholders that this is only one part of the sustainability story; many important environmental and social issues are not directly ‘covered’ by greenhouse gas emission accounting – such as biodiversity, water use and health.
If we take Triodos Bank as an example, assessing the absolute emissions is a crucial starting point to understand what the commitment to only finance sustainable sectors adds up to in terms of greenhouse gas emissions. Triodos did this for the first time in the Annual Report 2018. Actual emissions provide a baseline, which means the bank can start to improve and monitor the progress in working with customers to reduce our emissions. The level of sequestered emissions provides insight on how to reduce emissions in the future, effectively ‘cancelling out’ generated emissions. The results demonstrates which financial decisions make the most impact in relation to the generated emissions, sequestered (or absorbed emissions, like forestry projects) and avoided emissions (such as green energy generated from renewable energy projects) of the companies that Triodos Bank finances.
It’s important to develop harmonised ways to report on the results of this work and we are collaborating with other financial institutions to do that. Stakeholders should be confident in the information they see and be able to make fair comparisons between the footprint of different institutions. They should also know what this information does not tell them.
For example, avoided emissions and generated emissions cannot, and should not, be presented to give the impression that they cancel each other out, leaving a ‘net neutral’ situation. A solar project should, in time, replace the need for energy from fossil fuels, but they do not ‘cancel emissions out’. Given that we only have a finite amount of carbon that can be emitted into the atmosphere before the temperature goes above 1.5 degrees, these distinctions matter.
Carbon accounting needs to be adopted by financial institutions around the world if we are to achieve the biggest impact. The Global Alliance for Banking on Values can play a vital role in making this happen. This network of values-based banks, led by Triodos Bank (Europe) and Amalgamated Bank (North America), are collaborating and bring carbon accounting to banks operating across the world. This work resulted in 28 members of the GABV committing to assess and disclose their greenhouse gas emissions within three years, at a 10th anniversary meeting of the GABV held in Vancouver in February 2019.
The commitment, from members with combined assets of over USD 150 billion, means carbon accounting, using the PCAF methodology, will become genuinely global within three years. These developments have also been the catalyst for much wider efforts internationally to build a programme to attract conventional as well as more sustainable banks and other financial institutions to start carbon accounting.
Several national, European and global initiatives help banks on their journey towards taking sustainability more into account. One way to generalise the PCAF method further across the mainstream, are the United Nations Principles for Responsible Banking. In September 2019, many banks will sign this initiative for the banking sector. It calls for specific targets to be set, based upon understanding the most significant impacts. In our view, PCAF can help to achieve that goal.
Ultimately, this movement surrounding carbon accounting will enable participating banks to make financial decisions that limit the impact of the emissions of their financed assets so they can keep their contribution within safe environmental levels. It is not the whole answer to this challenge in itself. But it is the foundation to make that happen. It is materially different to an approach – important as it is – that’s based on financial risk alone. Assessing greenhouse gas emissions in this way, connecting them to a science-based target of 1.5 degrees and as soon as possible, moves beyond a focus on the balance sheet of banks, for example, and the risks inherent in climate change.
In a sense, the PCAF initiative reflects a genuine will to address a fundamental question about the positive role that business and banks, in particular, can play in safeguarding the well-being of future generations. It’s a sentiment that could resonate with schoolchildren inspired to take to the streets, politicians declaring a climate emergency and central bankers warning of the catastrophic impact of climate change to business as much as society. And it could hardly be more urgent.
Read more from the Sustainable Finance Report here.