How Banks Can Step Up in the Fight Against Climate Change
A lot of focus in the fight against climate change revolves around lifestyle changes, eco-friendly building, and new sources of sustainable energy. But it’s also become increasingly important to acknowledge the role of banks in fighting climate change. After all, banks are a key source of funding for infrastructure projects, investments in clean energy, and more. Part of the goal for the climate summit in Paris at the end of 2015 was discussing how to mobilize the funds necessary to keep global warming in its target range and adapt to the effects. Not only that, but many major banks are now focusing more of their efforts on sustainability, by establishing sustainable investment think tanks to setting up environmentally friendly portfolios and issuing green bonds.
It’s clear that financial institutions play a major role in the fight to reduce greenhouse gases in the atmosphere, fund green energy investments, and push the economy toward sustainability. But simply mobilizing funds isn’t enough. Banks need to — and can — play a bigger role in reshaping how we think about fighting climate change and trying to cut carbon from our lives and the atmosphere.
It’s not just the big banks that wield power, either. While they have considerable resources and diverse services available, millennials are gravitating more toward community banks and credit unions. Studies have shown that Millennials care about sustainability, and more notably, they’re willing to pay more for it. They are mobilizing and taking action around the world. Furthermore, Millennials are twice as likely to invest in companies that show a commitment to social or environmental goals.
Like any business, banks need to look at their own policies and set up clear sustainability guidelines. Looking for ways to reduce waste and improving their own operational efficiencies are just a few of the most basic ways banks can rise to the challenge.
Boston Common Asset Management did an impact study to assess whether banks around the world were prepared for climate change. One key area it looked at is whether banks were the institutions were adequately assessing climate risk as part of their general business practices. Research suggests that one of the major effects of climate change will be unpredictable severe weather, such as hurricanes and flooding. This results in greater risk to property, crops, and businesses, which in turn has an affect on a bank’s lending policies. Small banks in particular are a major source of small business loans and tend to have a very strong presence in rural communities.
The Boston Common study found that the majority of the banks involved did not have any sort of long-term strategy for dealing with climate risk. It urged banks to start incorporating carbon risk into its underwriting and lending policies, which could mean closer scrutiny of how they invest, and potentially better disclosure of what constitutes green energy and green technology, something the student also noted many banks did not do.
While larger institutions have more resources to devote, smaller banks need to make these same considerations in order to maintain their own stability, especially when they are the major source for small business loans.
Not only that, but banks need to expand their lines of green investments. Eco-friendly mutual funds and stocks are just one part of it. Offering green bonds is a key way to finance low-carbon building and infrastructure projects that benefit cities in the long-term.
Another, less-conventional alternative may not only benefit the environment by helping to offset individual carbon footprints, but also an entire demographic of customers: a credit card with a 2% cash back rewards option. Given the average millennial’s spending habits, that would yield $270.28 per year. It would be easy to direct the rewards from the card into a Carbon Xprint term deposit. The investment would allow the credit card holder to offset a significant portion of their carbon footprints without having to change their own behaviors. In addition, the term deposits would produce addition returns on the original cash-back savings from the card while helping banks finance green projects.
There is a long way still to go in the fight against climate change. But it is increasingly important to take action now, developing long-term strategies to prevent the effects of climate change from escalating. Banks already play a significant role; but stepping up their sustainability commitments on all front could escalate financial institutions to leaders in the change to a new, low-carbon economy.
