Green Finance Briefing: ‘Business as usual’ is proving unsustainable for banks

Banks and large financial institutions are generally viewed as businesses built under the traditional profit-centered capitalist model. But climate change is forcing everyone to rethink their strategy - business as usual is proving to be unsustainable. 

But what does it actually mean for a bank to be sustainable? How can a bank place climate change at the forefront of its agenda? These were the questions on the mind of Ken LaRoe, a banker who felt the need to “do something more than just making people a bunch of money”. 

LaRoe founded three banks throughout his career. The first one was Florida Choice Bank in 1999, which he grew to over $400 million in assets and sold in 2006. He then went on a soul searching journey across the US, which changed his mindset into adopting a more holistic approach to business.

Using a value-based business model aimed at achieving financial success without ethical, environmental or cultural compromises, he founded First Green Bank in Florida. After reaching $825 million in assets, the bank was sold and, unfortunately, the values it had been founded on were discounted. 

Now, LaRoe’s newfound mission lies with Climate First Bank, which aims to help reverse the climate crisis by aligning with four of the UN’s Sustainable Development Goals: affordable and clean energy, sustainable cities and communities, climate action, and partnerships.

Climate First Bank opened mid last year as the only Benefits Corporation bank in Florida and was Net Zero from day one. It offers personal and business loans, as well as deposit accounts and cash management online, on mobile and in-branch.

“In our day to day operations, we try to do everything through the lens of what we can do to reduce our carbon footprint. There are daily challenges of running a bank and keeping in mind that we need to be more than just bankers. It's fun. It's challenging. It's hard,” LaRoe told Tearsheet.

Climate awareness was built right into the business plan submitted to regulators, against attorneys’ warnings that it would make the whole process harder and more confusing. But this was essential to LaRoe, who wanted to break the ice and show them why this was important. 

There is no actual regulatory difference between a green bank and a normal bank, he said. The US has community development financial institutions with objectives like financial inclusion and inner city development. CDFI banks can benefit from some climate incentives, but 60% of their loans must be in a low-to-moderate income census tract. 

But Climate First Bank doesn’t fulfill that requirement, so what can it do as a regular state-chartered, FDIC-insured bank to make a difference? The answer is lending towards sustainable development - essentially funding the local transition to green energy and lowering carbon footprints.

The bank pioneered a residential rooftop solar loan program, and is working on fully digitizing it so that anyone in the US can get approved in five minutes, and then get sent an approved installer. The bank also offers interest rate discounts to anybody that does a sustainable project.

“We would be glad to do a loan if it’s helping the community or a small business. But we do have a pretty exhaustive list of stuff we won't do, such as dirty energy or anything extractive. For example, we won't finance gas stations or convenience stores unless they do solar and EV charging. So that's another fun part of it, because it's that whole gray area of figuring out solutions,” LaRoe said. 

A proprietary code for a carbon calculator is also in development, to help customers find out how much carbon their purchases produced. There are plans to initiate an ESG platform as well.

But the journey remains challenging. In order to quantify and reduce their footprint, companies use the three scope methodology for tracking direct and indirect emissions. While Scope One (direct) emissions are easy to track and manage, LaRoe acknowledged that it’s very difficult for a bank to do the same for Scope Two and Three (indirect) emissions. 

“We want to get to a point where a bigger percentage of our portfolio is geared towards people that align with its values, or only people or businesses that are trying to make a difference,” he said. 

Chart of the week

Corporate culture is the biggest barrier for incorporating sustainability within company practices, a new study found. A mindset shift is proving to be critical for embedding sustainability into the core of the company – a big challenge for many businesses that follow traditional models. 

And short-term shareholder expectations are also slowing down the change towards a sustainable business model, while financial challenges - which are oftentimes presented as the main deterrent - came in last on the list.

“It’s not just change, but in some cases, radical change that’s required and that’s going to take a lot of bravery. It’s going to take a lot of strategic sense of direction, being clear about where we’re headed,” said Miguel Veiga-Pestana, head of corporate affairs & chief sustainability officer at Reckitt.

Food for thought

The Russia-Ukraine war is pressuring ESG agendas globally, with many investors and asset managers put to the test in setting governance as a main factor for future investments. 

The conflict could ignite a shift in future decision-making, highlighting the importance of taking social and governance factors into account more than they have been in the past, according to reports. Investors could expect a higher demand to monitor the consequences of the allocation of their capital, as the war is not only being fought militarily, but also financially, through economic sanctions that reverberate across the world. 

Some experts believe investors have failed in properly taking ESG into account by ignoring risks related to Russian investments before the war began, such as the annexation of Crimea in 2014. The decision to downgrade the Russian government’s ESG rating by MSCI from B to CCC a week ago came “eight years too late,” they said. 

From big banks like JPMorgan and Goldman Sachs, to energy groups BP and Shell, to Norway’s sovereign wealth fund, many giant corporations have announced their withdrawal from Russia, and the list is growing. 

This massive exodus, while welcomed, also begs the question - do fears of a Third World War need to be on the table for markets to take social and governance factors seriously? 

What we’re reading 

• A wartime imperative to speed up decarbonization (Bloomberg)
• Funding pours into rapidly growing climate fintech scene across Europe and US (Fintech Futures)
• Is climate finance going to be the next bubble? (Financial News)
• Santander acquires ESG consultancy & carbon markets company WayCarbon (ESG Today)
• TD sets new Climate Action Plan and Scope 3 financed emissions targets (Yahoo Finance)
• NYSE launches sustainability advisory council (ESG News)
• The State of Green Business 2022 (GreenBiz)

What we’re writing 

• US investors brace for upcoming climate risk regulations 
• Banking Briefing: Major Russian banks excluded from SWIFT
• How banks can tackle sustainable lending, in 4 charts 
• How fintechs like Aquaoso help banks assess climate risks in their lending portfolios
• The Green Finance outlook for 2022: Trends, concerns and new entrants