EXCLUSIVE: ‘The BIG green debate’ – Alain Cracau, Rabobank; Sandra Odendahl, Scotiabank and Bragi Fjalldal, Meniga in ‘The Fintech Magazine’

What role should and can banks play in steering society towards a more sustainable future?

$6.9trillion. That’s the amount we need to invest in green finance each year to meet our net-zero climate goals by 2050, according to the latest OECD (Organisation for Economic Co-operation and Development) research. For context, the entire GDP of the UK is $2.8trillion. And right now, we are not even close to achieving it.

If we continue with the current level of investments, by 2050 the planet will have warmed by 3°C, according to the United Nations Emissions Gap Report. That’s pretty much game over: the mass extinction of some species and the re-homing of an estimated 275 million people due to flooding.

The World Bank says trillions lies between humanity and carbon-neutral. Not billions. And the window of time to do something is closing. For greener energy alone, we’d need to annually increase our investments five-fold. Energy and power account for around 44 per cent of global carbon emissions, so it sounds a good place to start. However, more than 57 per cent of global energy investments still go to fossil fuel companies, according to the IEA (International Energy Agency).

The giant increase in green investment needed cannot be met by governments. An estimated 80 per cent must come from private finance. That means us: our bank accounts, investment portfolios, stocks and shares ISAs, and pension funds.   

So, what are financial institutions doing to help us get there? And what should they be doing? We asked three financial leaders: Alain Cracau, Director of Sustainable Business Development at Rabobank; Sandra Odendahl, Vice President, Social Impact and Sustainability at Scotiabank, and Bragi Fjalldal, CMO, VP Product & Business Development at Meniga. And this is what they said…

Banks ‘cannot be responsible for everything’

Sandra Odendahl believes banks should not overstep their role, even for something this serious: “I worry about banks taking on the role of government and policymakers,” she says. “Banks enable everything in the economy, but I’m a worried about making the financial sector responsible for everything in the economy. Some people might be receptive to the idea, but others’ reaction would be ‘back off’.”

It’s true that banks are not democratically elected and interference in public policy lays them open to accusations of hegemony, which  they’ve tried hard to avoid since the disastrous PR of the financial crisis. But it’s not that simple.

Financial services are interwoven in the fabric of corporations, the lives of consumers and even governments. The UK’s Conservative election campaign was bankrolled by hedge funds. A 2015 report revealed that 27 of the 59 wealthiest hedge fund leaders gave more than £15million to the future government.

Some institutional investors already influence the environment indirectly through political donations, while others, like banks, do so directly through investment decisions. The world’s biggest banks have put $2.7trillion into coal, oil and gas since the 2015 Paris Agreement, according to the annual Banking On Climate Change: 2020 Fossil Fuel Finance

Report, compiled and endorsed by 252 independent organisations worldwide, which tracks investment and other data on 35 financial institutions.

Smaller, retail financial products – mortgages and loans – are mostly backed by banks and also affect the planet. Banks could, if they chose, use these to effect change. And some are. Fifty-seven per cent of lenders plan to launch green mortgages after the pandemic, according to the Intermediary Mortgage Lenders Association, which should reduce carbon emissions. Among them, UK bank Tandem is launching a raft of environmentally-focussed products, positioning itself as ‘the good green bank’. It definitely sees itself as part of the solution and has presumably identified a revenue-generating opportunity in sustainable investments.

Alain Cracau, from Dutch cooperative Rabobank, is sympathetic to that view. In the Netherlands, a tie up between banks and government encourages it. The Dutch Green Funds Scheme (GFS) is a tax incentive that encourages environmentally-friendly initiatives. Individual investors lend their money to banks at lower interest rates, but are compensated with an environmental tax credit. These ‘green banks’ can then offer cheaper loans to environmental projects.

“One dollar of public money (tax) leverages $30 of financing,” says Cracau. He does see banks fulfilling a strategic role.

“What we, as banks, have is the data, the experience, the knowledge of what’s really happening, and what would be a realistic next step to improve the economy and society. Putting that knowledge together with government is important. While we will never say to clients ‘you should do this’, we have our own responsibility [towards sustainability]. It’s about leadership, it’s about a mindset,” he says.

The cooperative bank’s members are already well aware of the influential relationships banks have with people and with government, and looks to them to be first movers when it comes to building a new, more-sustainable economy.

“We talk to our members in dialogue sessions that we hold in the regions – about the economy, jobs, and how we want to live as a society,” says Cracau. “And people always come back to us and say ‘you are the organisation that talks to us, that talks to the government, that talks to companies. Could you be the lynchpin?’. So, that’s one role for banks: creating a dialogue about how society works together [on sustainability].

“The public-private coalition, I think, is important here. As a country, the Dutch are also signed up to the Paris Climate Agreement and, over the next 10 years The Netherlands need to invest €40billion. Therefore, it’s important that we talk to both the government and businesses about how we are going to spend that.”

Rabobank is also active in encouraging ‘the sort of disruptive innovation for the transitions we need’, according to Cracau. “That inspires a lot of our own people, whatever their role in the bank, to contribute to how we make this happen.

“Sustainability creates a new economy and, wherever there is an economy, you come back to the bank”, he adds.

How are banks encouraging green investments?

Institutional, and many retail, investors finally appear to have ‘got’ the sustainable investment message: that ‘doing good’ doesn’t equate to investments performing badly. And there is plenty of evidence now to support that.

In early 2020, Larry Fink, the boss of BlackRock, the largest asset management company in the world, in his annual letter to CEOs, famously stated that it would henceforth ‘put sustainability at the centre of its investment strategy’. The decision was no doubt partly – if not primarily – motivated by a desire to protect its investments from the risk (both regulatory and reputational) that companies who did no more than pay lip service to environment, social and governance (ESG) principles, posed to its investments.

MSCI’s 2021 Global Institutional Investor Survey of 200 institutions that owned assets totalling approximately US$18trillion, found that more than three-quarters (77 per cent) had increased ESG investments ‘significantly’ or ‘moderately’ last year. Among those, one third of the largest institutions (over US$200billion of assets) said climate risk will be the biggest determinant of how they make investment decisions in the future.

Cracau says the bank’s private clients, too, are looking for more impact investments. “Everybody is looking for a return, but, on top of that, they want a return for society,” he says. “And we see that sustainable companies are a better risk – for personal investors, a business investor or even venture capital.

“Climate change creates big risks. And banks are all about risk management. So it becomes part of how money is managed in a financial institution, how you demonstrate where you get the money from, and what you put it into,” says Cracau.

The individual or retail investor might be more powerful than they think in this battle. But do they understand how to access the sustainable investment market?

Bragi Fjalldal from Meniga believes banks have a duty to show them. Meniga’s digital banking platform helps banks use their data to build customer engagement through finance management and more solutions for customers. It recently launched a white-label Carbon Insights tool (see left) that reveals a customer’s carbon footprint, nudges them towards more sustainable consumption and offers them impact investment options.

The fintech is based in Iceland, a country witnessing, firsthand, the dramatic impact of climate change.

“This is about giving customers information to make the right choices,” Fjalldal says.

But when, in the US, just 34 per cent of people have even basic financial literacy, according to a FINRA survey, it seems ambitious for banks to play a leading role in teaching climate finance. Nevertheless, in North America Scotiabank has developed tools to help ethical investors make the right choices that Fjalldal talks about.

Its impact investing tool for direct investors in Canada introduces a gamification element to selecting target companies that align with account holder’s personal beliefs. Anyone with a Scotia iTrade brokerage account can create a user profile, based on their values around the environment, social issues and corporate governance. The tool then matches them to companies that align with their passions.

“As a bank, we are financing companies that generate renewable or non-emitting electricity, companies developing green buildings and low-carbon neighbourhoods, government and private sector companies developing mass transit systems that get people out of their cars,” says Odendahl. “We are also financing people who want to retrofit for energy efficiency… individuals and companies. And our iTrade tool allows people to search the ESG ratings of companies they might be interested in.”

It’s all part of the bank’s pledge in November 2019 to ‘mobilise C$100billion by 2025’ to reduce climate change impacts,. That would offset the $92billion that the Rainforest Action Network claims the bank has spent over the past few years in fossil fuel financing. But that’s not to single out the bank; Greenpeace estimates that the world’s top banks account for $1.9trillion of such investments since the 2015 Paris accord was signed.

Could data save our climate?

We’ve all heard the mantra ‘data is the new oil’, but could it, in fact, be the way to reverse fossil fuel-induced climate change?

“There is a growing trend of environmentally-conscious consumption, with customers wanting to understand their environmental footprint and start reducing it,” says Meniga’s Fjalldal.  “As custodians of data, banks are in a unique position to make this accessible, seamless and intuitive. Our own carbon footprinting surveys show that 80 per cent of people are interested in understanding it, and more than 80 per cent want their bank to provide that information.There is a real and present customer need.”

That has huge potential for banks’ digital engagement, says Fjalldal.

“The likes of N26, Monzo, and Revolut have shown that customers want multiple reasons to engage with banking. They want banks to tell them things about their finances, including their environmental impact. So, there’s an opportunity to turn this environmental service into a loyalty and engagement driver.

“Being more environmentally conscious tends to go hand in hand with being more sensible about how you spend,” he adds. “For most people who drive cars, for instance, fuel is probably one of the biggest spending categories. Reducing their fuel spend will save them money and save the environment at the same time. If we take that saving and funnel it into an environmentally sound investment, then we’ve created a very interesting ecosystem. We can expand this ESG investment thinking into, sort of, ESG consumption.”

Regulators, not banks, lead

We feel the pain of losing money more intensely than the joy of gaining it, according to Yale scientists. Although that was based on their observations of monkeys using grapes as currency, regulators use the same principle to make heavy carbon-emitters less profitable for their investor community.

The carbon markets are where profit and pain meet: the big carbon emitters must buy tokens, each allowing them to produce one tonne of emissions. There is a finite number of tokens, which gets smaller over time, and, therefore, more expensive. It’s potentially a profit drain for investors and intended to put pressure on emitters to take carbon-reducing steps. It’s also one of the ways green energy becomes more profitable than burning fossil fuels, and it’s part of Europe’s plan to meet the Paris-agreed goal of each member state becoming carbon-neutral by 2050.

European policymakers clearly see private investment as being at the heart of the transition to a low-carbon economy. The European Green Deal is directing sustainable finance, not the banks. But, ultimately, that will leave them with no choice other than to mainstream green private finance. Cracau, in fact, argues that ‘banks could think ahead of this Green Deal’ and take the initiative now.

There are signs that the industry is already starting to take this leadership role. Investment managers, including a couple of dozen banks, jointly created the Principles for Responsible Investment in 2019. And others are getting braver. A cohort of investment houses slammed HSBC, last January, for continuing to invest in fossil fuels, despite winning Euromoney’s Most Sustainable Bank of the Year award.

Investment in green and sustainable activities has ramped up. Green and sustainable equity totalled $9.7billion in the first nine months of 2020 – 38 per cent up on the same months of 2019. And, in September 2020, we saw a record volume of green and social bond issuances, at $62billion (though mostly due to an eight-fold increase in social bonds sparked by issues brought to light by the pandemic). Meanwhile, the earth warmed by another 1.02°C.

In the face of those statistics, maybe sinking our cash into sustainable investment portfolios isn’t enough.

“Investing in responsible products is just one action you can take,” says Odendahl. “But I worry people think then that they’re done. No, they need to change behaviour, which changes the way goods and services are produced, and changes the things banks finance and invest in.”

That said, studies have found the single best way for individuals to reduce their carbon footprint is through their investments, specifically pension pots. The average UK pension pot contains £61,897, according to the Financial Conduct Authority, and one calculation suggests switching to a green plan is 27 times more effective than never flying again and going vegan combined. Today, more than £3trillion of UK pension money is being used to cut down the rainforest and fund fossil fuel companies.

Cracau, Odendahl and Fjalldal all agree that banks and asset managers can help us reach our net zero goals. But the jury is still out on how – and how far they should go.

This article was published in The Fintech Magazine #19, Page 54-56