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November 17, 2021

Sustainable Banking?

We are in the midst of a global climate crisis. Is sustainable banking an oxymoron? Our actions, now more than ever before, are having a direct and tangible impact on our environment. So, what are we doing to save the planet? What can banks do to help?

We are in the midst of a global climate crisis. Is sustainable banking an oxymoron? Our actions, now more than ever before, are having a direct and tangible impact on our environment. So, what are we doing to save the planet? What can banks do to help?

It is imperative that financial institutions join in the fight against climate change. Financial institutions facilitate the movement of capital and enable business activities across the world and as such, their actions influence behaviours.

Sustainability should already be a focus for banks and financial institutions through their environmental, social and governance (ESG) considerations. Evidently, given the current state of global affairs, ESG will become increasingly important for banks and financial institutions. They will need to focus on transitional environmental risks such as legislation to promote sustainability or bans on unsustainable activities.

As well as structural changes in demand and supply for products, services and commodities.  
In 2019, the UN launched its Principles of Responsible Banking (PBRs) which encouraged banks to work with clients to encourage sustainable practices. Over 200 international banks have signed up to the PBRs but some of the world’s biggest banks are notably absent. Furthermore, the PBRs are not binding nor compulsory; breaches do not result in fines or penalties. Whilst the intention behind the PBRs is clearly climate positive, lack of enforceability results in little traction.

However, during the COP26 summit this month, 450 financial firms across 45 nations committed to align their businesses with net zero goals. This is known as the Glasgow Financial Alliance for Net Zero (GFANZ). The result of which is that $130 trillion worth of assets are now targeted towards greener outcomes. 

Financial institutions can make a greener impact in two main ways – through their investing and their lending. On the investment side there have been positive developments. Last year, BlackRock highlighted its commitment to sustainability. BlackRock stated that all active portfolios and advisory strategies will be fully ESG integrated. At the portfolio level, managers will be accountable for appropriately managing exposure to ESG risks and documenting how those considerations have affected investment decisions.

Various concepts can be applied to drive the financial system towards net zero. One example is the ‘polluter pays’ principle. As the name suggests, this concept encourages higher taxation for those that are big polluters. Logically it makes sense – it creates accountability for big polluters and should encourage a change in behaviour and business patterns. For instance, the shipping industry accounts for more than 2% of global emissions. There is pressure building to impose a significant carbon tax on the shipping industry to motivate ship-owners to invest in greener technology and take responsibility for their part in the climate crisis. Increased tax charges are an important factor for banks to consider since they can have profound effects on the liquidity of their clients. Borrowers paying higher taxes due to polluting activities may consequently struggle to service debt obligations, thereby encouraging banks to lend to greener clients.

In order for the polluter pays principle to work, the financial system has to discourage polluting behaviour actively. It is inherently contradictory for a financial institution to deter some polluting activities through increased green investment, but still invest in, and fund, other polluting activities. If a bank commits to spending a certain amount to invest in environmentally friendly clients, this is substantially undermined if the bank continues to funnel its resources into funding the polluting giants. So for banks and other financial institutions to have a meaningful impact on the environment there needs to be consistency in their investment and lending strategies. 

Christy Wilson, tax associate at Katten Muchin Rosenman UK LLP

https://katten.com/christy-wilson


Photo by Jason Blackeye on Unsplash

 


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