To stay relevant in the long run, banks may need to get greener

With more interest from the public, green banking may be making its way into the mainstream. 39% of U.S. voters would switch banks to avoid having their deposits used to fund oil and gas, according to a poll by challenger bank Aspiration.

We’re also seeing a change in investors’ mindset when it comes to investing in fossil fuels versus renewable energy. There’s more weight being put on ESG, or Environmental, Social, and Corporate Governance – factors that help measure sustainability and the societal impact of an investment. NetEra Energy, one of the largest investors in renewable energy in the U.S. has seen its shares double in the last two years. Meanwhile, Exxon and Peabody Energy shares are down 52% and 95% respectively.

Banks are picking up on this shift. Many of them are taking steps to shed the image of fossil fuel funders. Citi and CIT are offering sustainable investment solutions. Morgan Stanley, JPMorgan Chase, and Citigroup have all said they won’t fund arctic refuge oil drilling.

“Banks are primarily going green because it is becoming widely accepted that doing so aligns their economic interests,” said Tim Buckley, a financial analyst at IEEFA.org, a nonprofit that aims to accelerate the move to a sustainable energy economy. “[There’s also] a growing acceptance of the increased financial risks of continuing to invest in fossil fuel assets.”

In terms of establishing themselves as green banking solutions, challenger banks, with their digital-first focus, may have the upper hand.

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“Fintech’s digitally native approach is already far more aligned with elements of the E in ESG, just looking at the move from paper to electronic,” said Dr. Ruth Wandhöfer, partner at fintech investment firm Gauss Ventures.

Challenger banks that offer ecologically friendly services are popping up globally. The Italian challenger bank Flowe, which launched in July, partnered with reforestation start-up ZeroCO2 to allow users to plant trees in Guatemala. Customers get notifications through the Flowe app about how their trees are doing. 

In the U.S., the challenger bank Aspiration has built its reputation on being an eco-friendly financial institution. All deposits made into an Aspiration Save & Spend account are fossil-fuel free, said CEO Andrei Cherny. The bank account gives you a sustainability score, which shows which stores you shop at provide a positive impact on the planet and which do not. It also plants a tree for every purchase made.

“Everything that we do at Aspiration is really offering people financial options built around conscience and sustainability,” said Cherny.

For incumbent banks, their main challenge in going green may be in figuring out how to establish themselves as more environmentally aware, without alienating their existing customers. So far, banks’ steps to becoming more environmentally friendly are small-scale — promises to align with the Paris Agreement and special loan deals for renewable energy projects.

CIT, a New York-based bank which finances energy projects, recently started incorporating renewable energy into its lending portfolio. The bank has lent over $2.5 billion to renewable energy projects over the past couple of years. This year, it was also named Energy Lead Arranger of the Year by Power Finance & Risk. But even so, it continues to finance conventional energy projects and oil and gas production.

“Renewables are intermittent sources of power and until you make adjustments to the grid to accommodate that, you still need a lot of gas-fired generation,” said Mike Lorusso, managing director and group head for CIT Energy.

For CIT, playing the role of lender means following the trends it sees in front of it.

“Our approach is to view which trends we see as having the best returns, the best growth potential, the best financing opportunities for us, and focus on those,” he said.

But if certain banks are becoming more environmentally conscientious because of trends, there’s a chance they may switch gears if this trend changes. A law proposed by Comptroller of the Currency, Brian Brooks, could make it illegal to refuse lending to a specific business category. This could make it easier for banks to remain un-green and simply say it’s out of their hands.

Even if this law were to be approved, it may still be in banks’ best interest to start finding ways to steer in a greener direction.

“Maybe it’s in their short-term interest, if it’s a way to get profit this year and next, but if you’re a financial institution you should be thinking about what your financial interests are 20 to 40 years from now,” said Aspiration’s Cherny. 

“And an acceleration of climate change, with all the risks that it carries, with all the impact that it’s going to have on economic questions, to say nothing of human questions, means that if you’re thinking long-term, then you almost have to be thinking about how you as a financial institution can be fighting climate change as opposed to contributing to it.”