Green Finance Briefing: An intro to environmental sustainability in banking

Sustainability has been quickly rising through the ranks to become a core value on the corporate agenda – and banks are increasingly pressured to start changing their practices towards becoming truly sustainable. 

But what is environmental sustainability in banking? This is a relatively new concept, and understanding the basics is essential for any bank to start their sustainability strategy. 

For banks and financial institutions, sustainability initiatives present opportunities as well as risks, according to Kate Drew, director of research at CCG Insights. Drew explained in a new report the current landscape of environmental sustainability in banking.

She identified a couple of important reasons why banks should get involved in sustainability:

• Stakeholder and consumer pressures: Investors want to invest in the future, not the past, and the future involves clean energy, sustainable ecosystems, environmentally-friendly industries etc. Consumers vote with their wallets, and they want to align their finances with their values. And increasingly, consumer values revolve around sustainability, driven by younger generations. 

• Regulation: US regulators are starting to hone in on greenwashing, proposing new sets of disclosure requirements on ESG funds. The current administration is focusing on mitigating climate change, in light of the recently passed Inflation Reduction Act which set aside nearly $400 billion to invest in solutions to reduce emissions. The ball has started to roll, and doesn't show signs of slowing down. 

• New opportunities: This situation is bound to create a shift in resources, bringing with it a reallocation of capital away from the status quo. Growing investments in various new sectors present an opportunity for banks to store these new funds and provide other types of financial services on top of that. 

"We’re talking about a future that will see some industries shrink while others take off, creating major shifts in the kinds of clients that need financial services, and critically, that are lucrative to serve. In that sense, this is a business conversation," Drew said in the report.

• Reputation: Banks might face public scrutiny if they are perceived as not rising up to the occasion. Since the issue of sustainability is new territory for most banks, FIs and industry professionals, this might not be a big concern now. But it can become a big differentiator in the future. 

Scope 3 emissions 

Any bank's strategy towards sustainability involves measuring Scope 3 emissions, the biggest hurdle by far. 

Scopes 1 and 2 revolve around any company's own direct emissions, like office energy use or other operational factors. Scope 3 refers to indirect emissions, or financed emissions. Banks never had to think about the emissions caused by projects they participated in before. But this will slowly become the new normal. 

Indirect emissions are essential to understanding any company's impact on the environment. For banks, these are by far the most important, being the world's financiers. Measuring what their money enables is crucial to the decarbonization process. 

But it is also the hardest thing to do. As Drew noted in her report, this would require a bank to determine its clients emissions and then calculate its own share of those emissions. 

The Partnership for Carbon Accounting Financials (PCAF) provides standards and methodologies that can be used to measure Scope 3 emissions in accordance with the GHG protocol. In fact, PCAF is "gaining wide acceptance by the banking industry", Drew concluded from her talks to banks and experts. 

Today, many of these calculations use estimates, averages and proxies because of the lack of granular data in many areas. However, experts say that the lack of data shouldn't deter banks from starting this process, as imperfect as it is today. As this field evolves and expands, results will grow to show more accurate information.

Scope 1 and 2 emissions are great starting points, and they're also the most likely to be regulated first given the fact that they're easier to calculate, and people generally agree on the rules to abide by. Scope 3 regulation is much more challenging, which is also why the SEC's proposal did not require the reporting of all Scope 3 emissions.

"A bank should be looking at Scope 3 by the end of its first year in building out its impact

measurement program, though it’s unlikely to begin actual calculations or target setting until year two. By then, banks should also start to think more holistically about their long-term roadmaps and setting reduction targets along the way," the report said.

While every bank is different, the goals remain the same – identify and gather the data needed to measure baseline emissions, calculate those emissions and adjust. Calculations and updates will have to be done regularly, so better to start sooner rather than later. 

"Among all of the experts and banking executives we spoke to, there is a single prevailing piece of advice they all share: “Just get started.” We heard it over and over again while compiling this report. If you get too caught up in the plan, you will struggle. Instead, form a small team of people who can champion the effort and task them with figuring out how to start collecting data for Scopes 1&2. Go from there," Drew advised.  

Urgency is growing, so let's get started. 

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