Green Finance Briefing: The culture shift needed for the banking system to focus on climate risks

The impact that banks have on the real economy through their lending and investment is becoming increasingly recognized, particularly through their role in financing fossil fuel extraction and thus enabling the current climate crisis.

But it’s easy to point the finger, especially towards a huge target like the banking sector. 

Banks are giant companies, designed for stability, not for change. In this whole argument around climate change and the role of finance, we must not forget that the system that’s blamed is made of people, and many of them are fighting for change inside their institutions to address this issue. 

At the top, promises are being made and targets are set for the future – no need to remind anyone of the flurry of net zero commitments in the banking, finance and fintech sector. 

But there is still a great need for a mentality change at the senior level, because that trickles down from the top internally within the organization, allowing employees to contribute to the change and helping some feel more value-aligned with the corporation they work for. 

In order to implement this sort of holistic change implies having a management team that is well versed in sustainability solutions. Luckily, there are opportunities out there for the banking professionals who are concerned about climate change and are committed to fight for change inside their institutions to address this.

Enter the Climate Safe Lending Network – an international collaborative focused on accelerating the decarbonization of the banking sector.

The network brings together senior leaders from within banks, investment firms, NGOs, financial regulators and policy folk, businesses, and academia to collectively explore how they can play their role in accelerating change. 

It also ran a fellowship program over the past year with 23 participants from 20 banks globally, working to equip banks with climate leaders who can catalyze their transition to climate safe banking.  

One of the main takeaways from the program was that the banks that were moving the fastest on climate developed a plan not just for their lending and investment strategies, but also the institutional structures, operations, and culture to enable their products and services.

In a research report, the collective identified three top strategies that drove transformation within a bank:

• Integrating climate into all decision-making: instead of just thinking about some aspects as “green”, apply a climate lens to all business activities
• Evolving the role of sustainability teams: these teams shouldn’t work in isolation, ultimately they should enable the right conditions for each employee to play a part
• Building capabilities to act across the organization: facilitating interpersonal knowledge and skill sharing among colleagues 

People that participated in the fellowship highlighted that there is still a wide gap between the level of change that’s needed and what they saw as things that can be done by decision-makers. 

One of the participants at this fellowship was tasked with helping credit risk teams view climate risk as an essential part of their bank’s reviews and observed that climate risks were not adequately considered in loan risk analyses. Moreover, credit analysts were reluctant to change this strategy.

“There are some parts of the bank where no climate risk analysis is going on. They’ve never done it, they’re not hired to do it, they’re not compensated to do it. We have people who have great intentions, but it always comes down to business-side pressure,” the fellow said.

This example reveals that there are still many instances where employees wait for a top-down guidance or cultural change. What senior management and decision-makers find important and prioritize trickles down to other layers of the organization. 

But it’s hard to get management to pay attention to these issues, especially when there’s other worries dominating the agenda.

“My bank has been in chaos for two years. I’ve learnt that we don’t need to wait for the CEO to tell us what’s next. There are small pockets of what you can accomplish. A lot of it is about the alliances you build,” another fellow said. 

While still small relative to the scale of the problem, these types of initiatives could have big impacts. Perhaps we should rely less for guidance from those at the top, and just be the change we want to see in the world. And the ones fighting to change things from the inside will be the unsung heroes of a more sustainable economy. 

Chart of the week

This is why Europe is always one step ahead of the US when it comes to climate tech solutions…

Quote of the week 

“We need to shift from voluntary or aspirational pledges to concrete implementation plans with real accountability. The smartest companies have seen the writing on the wall and are quickly moving ahead, but too many are still imagining that some sort of clever ESG accounting is going to allow them to avoid deep decarbonization.”

• Thomas Hale, an associate professor at the Blavatnik School of Government at University of Oxford

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What we’re reading 

Offsets watchdog aiming for clarity on net zero risks creating confusion (Bloomberg)

How Charles Koch purchased the Supreme Court's EPA decision (The Intercept)

Regulatory Solutions: A Global Crackdown on ESG Greenwash (Harvard Law School)

Pivotal moment in the transition away from fossil fuels must leave fossil gas behind (Climate Bonds)