The 'good stuff' happening in sustainable lending in the US

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The 'good stuff' happening in sustainable lending in the US

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The Inflation Reduction Act (IRA), passed by the US Congress in 2022 and signed into law by President Biden, is working as intended, and America’s major banks are getting onboard with sustainable lending. That’s what we’re hearing from leaders of the financial institution wing of Boston-based Ceres – the nonprofit advocacy organisation formed in 1989 in the wake of the Exxon Valdez disaster and prominent in efforts to accelerate the transition to what they call “a cleaner, more just, and sustainable economy.”

Finextra contacted Ceres representatives for a status report on the financial services industry’s climate mitigation and sustainable finance progress, after reporting on a similar conversation a year ago. It’s an auspicious time for an update, as New York Climate Week starts 22 September, and two weeks later, Sustainable Finance Live takes place in London – co-sponsored by Finextra and ResponsibleRisk.

Positive climate transition trends

Blair Bateson, director of financial services within Ceres’s “Company Network” told us, first as a general overview of the industry’s progress, that trends were looking positive for climate transition efforts.

“I think we're seeing a lot of good stuff happening on implementation, for the large banks, the global banks we talked about last time. Many of them have set pretty ambitious targets to reduce their finance emissions, and now have really moved into this sort of implementation zone where they're trying to figure out how they're actually going to achieve those targets.”

When we interviewed senior representatives at Ceres last year, their financial services team was cautiously optimistic about corporate awareness of environmental and social concerns, and encouraged by the resulting climate action mitigation progress made in the sustainable finance sector.

During that late-summer 2023 conversation, managers of the nonprofit’s Company Network (comprised of 50 of the US’s largest public and private companies in various industry sectors) and the industry-specific sub-group working with leaders in the financial services sector described the current state of their efforts to encourage banks and their corporate clients to create and implement sensible climate transition plans. They noted that while not all major banks they’d involved or interacted with in their activities had progressed as much as desired, they were nonetheless optimistic about the prospects of doing so.

Ceres publishes periodic reports on the sustainability performance of various industry sectors, primarily within the US, and their Responsible Policy Engagement Benchmarking for Banks study had just been released when we spoke last August. Since then, they’ve published another report focused on the financial sector’s sustainable finance opportunities, in mid-November 2023 and also introduced an industry-agnostic climate action transition plan blueprint guide this past June.

Ceres primarily has focused its time and attention on major companies and larger sustainable investment groups in its policy advocacy and mostly friendly, if insistent outreach activities. Finextra asked during our previous conversation about other sectors of the economy that also would benefit from climate transition guidance, especially smaller financial institutions and their clients. Ceres has been an early and strong supporter of UN-affiliated SME Climate Hub, which focuses on helping small to medium-sized companies build climate action and resilience plans, and this spring, the organisation introduced its own sustainability assessment tool for smaller companies, Ceres Roadmap 360.

IRA impact on sustainability

In our latest discussion, we asked Bateson to help us update Finextra’s readers on Ceres’s member financial institutions’ sustainability plans and transition timelines – detailed commitments to climate mitigation action Ceres has been vigorously encouraging for several years. Specifically, we wanted to know how far have banks and other financial institutions come in their environmental responsiveness efforts over the past year, and how far do they still have to go relative to targets recommended by Ceres and other prominent climate action proponents. We also asked if the organisation had any firm details on results generated, or specific projects and initiatives funded, by the IRA.

On the latter question, Bateson noted that financial institutions were, in most cases, not the direct recipients of IRA funding. However, he also acknowledged that many banks, credit unions, and community development financial institutions have been closely and successfully involved through their clients in IRA investment activities. 

“Everything I hear is that most of the tax credits and incentives that are in the IRA are being well used, across sectors. We see that as a huge success from a banking perspective.” Pointing out that banking institutions will often serve and finance companies providing emerging products and services targeted for IRA funding and support, he’s bullish on those institutions’ role in moving the country forward in what Ceres calls a “just” transition beyond fossil fuels and unsustainable practices into earth-friendly, lower-risk, higher resilience models.

“There is a huge opportunity [for financial services] to amplify the spending that's in the IRA, and help de-risk projects that they can then maybe fit into their risk appetite that they might not have before.” Bateson emphasised that smaller institutions can also play a part in this movement. “Market growth generally has really been beneficial to banks. One specific example we saw recently was the Greenhouse Gas Reduction Fund (GGRF), which is part of the IRA, awarded a number of grantees … and these are smaller community development financial institutions that typically are getting this money, but the idea is to have partnerships with large commercial banks to magnify the impact of that many times over. So, we were really glad to see those awards made, and we're excited to see banks showing a lot of interest in how to amplify that funding.”

Regarding the IRA’s aggregate, and widely dispersed projects funded thus far, political opposition to the landmark legislation has always been a bit disingenuous. That’s because, though no Republicans in Congress voted for it, many of the states and districts represented by congressional and other leaders protesting against the Act’s costs and impacts were the greatest beneficiaries of its investments. Credits and grants such as the GGRF were targeted to companies and communities across the US and authorised through various bidding processes. They were awarded to finance renewable energy projects and other initiatives targeted by the legislation to fight the increasing environmental and social consequences of climate change. In fact, according to a source quoted by Time magazine, $270 billion has been invested in clean energy since the IRA became law.

Ceres has always been a major IRA supporter, but we asked about progress made in other areas of sustainability and financed emissions by their member financial services organisations, and the industry in general.

Bateson pointed to other legislative and business-government partnerships where environmental advocacy by their organisation and others was helping lead to better energy usage practices in general. And that bodes well for the future of industry, he said.

“It’s not just the IRA that is benefiting companies. It's also the bipartisan infrastructure legislation and the CHIPS act, particularly in the tech sectors. So, as a lot of these companies scale up production, renewable energy, in particular, and with the huge growth in solar, and continued development of wind … all of that is financing opportunity for banks.”

Financial services to play a more prominent role in climate transition

Noting that many banks have historically offered large tax equity businesses as well, Bateson shared his expectation that the financial industry could play a larger role not just helping finance construction and manufacturing in technology sectors, but especially going forward as more renewable energy projects are proposed and funded. “A lot of the tax credits in the IRA are actually transferable. there isn't even a need for a tax equity structure necessarily, the bank can just take advantage of that tax credit more directly.”

What about those major bank climate transition plans and promises? We asked Bateson to share his thoughts on how and why some major financial institutions had backed off on their original commitments to actively confront climate change, and to decrease or end their investments in environmentally damaging, increasingly risky sectors of the economy like fossil fuels, non-renewable materials, and the like. Both the Climate Action 100+ and Net Zero Banking Alliance have recently seen defections by financial services companies that had earlier signed on as supporters. Given that, as World Resources Institute points out, “banks will play a key role” in climate change transition plans – which Ceres has certainly agreed with and advocated as well – and according to WRI’s research, they aren’t on track to reach their stated goals to reach their committed Net Zero targets, what does it all mean in terms of actual results for the climate action movement?

According to Bateson, these defections and apparent backsliding by some banks is a concern, is a concern, yet, he’s still hopeful. “I think this comes down to this question of bank transition plans and how banks are moving forward to achieve their targets, which I think they are, in many ways. But certainly, I think some are adjusting their strategies - as they should.” He alluded to what he called “misguided political attacks” on ESG and environmental and social activism that have recently put pressure on banks and other large companies to carefully consider their strategies.

“I think the great thing that we've seen, and continue to be optimistic about, is that banks are not backing away from the big commitments that they've made. We haven't seen anyone say, ‘Oh, we're not going to pursue our finance division’s targets or our net zero commitments anymore.’”

Bateson said the opposite is actually true, from his view. “You know, banks continue to set targets for different sectors, including some pretty tricky ones, like aviation, steel, etc. And then, I think we've seen implementation continue apace. So, whether that's banks working individually with their clients, or as part of groups like Climate Action 100, or whatever, I don't think we've seen any slowdown in what banks are actually doing. Obviously, we’ve seen them protect themselves from legal risk, but you know, we haven't really seen any change in their activity.”

Looking to the future of climate reporting

Bateson shared a new Ceres report on avoided emissions, which he felt represented a great opportunity for investors to manage climate impact. We also talked about how global greenhouse gas emissions reporting standards were (finally) being simplified, with many of the major reporting regimes consolidating into only a handful now from what at one time amounted to 100 or more options from which companies had to choose.

We also asked Bateson if there were any highlights he would pick, any exceptional “wins” that stand out for Ceres from its outreach and advocacy efforts over the past year, or signature developments in the climate action sector that moved the needle, and will likely make it easier for companies to make successful transitions to lower carbon emissions and greater resilience for the future. He agreed that the standards updates are a very positive development.

“I think that convergence among sustainability related reporting standards will really help both big companies and small, because everything now is asking the same questions, the standards are more aligned,” which, as he pointed out, comes after “a decade or more of effort from Ceres and other organisations.” Bateson said he was hopeful that this simplified reporting burden on organisations, “might give them more time to actually focus on the strategy - and for smaller organisations, it makes [emissions reporting] more manageable as well.”

But Bateson also cautioned about overconfidence. “That’s not to say that every community bank in the US is going to be putting out a TCFD (Task Force on Climate-Related Financial Disclosures) report tomorrow, because definitely not. But I think [standardisation in reporting frameworks] helps, and the larger organisations also really break the path for smaller organisations. Because once you have an industry standard that, someone can say, ‘All right, this is what the large banks are doing. I'm just going to copy it, or, put my own spin on it, but I'm going to follow this same methodology,’ I think that's an area of opportunity for the next tier of banks.”

Most important, Bateson concluded, is for these emissions measurement and reporting exercises, for all phases of a bank’s operations – Scope 1, 2, and 3, or those from its own facilities, from generating the electricity they use, and from indirect sources such as employee travel, suppliers, and customers – to be honest, authentic, and with specific objectives in mind.

We talked about European climate reporting regulations, and California’s mandated and soon-to-be-implemented emissions reporting requirements for most larger companies doing business in the state - the first of their kind from a US entity and applicable to not just American but global firms as well. More governments are likely to follow suit over the next few years. Ceres, not surprisingly, is very supportive of the Golden State’s leadership and assertiveness on the issue, yet companies have to take it seriously, and view California’s emissions reporting requirements as an opportunity, not just a chore, Bateson said.

“The thing that we really want to watch for is the quality of that disclosure. Something we're thinking a lot about, and I'm working on with all of our member banks, is making sure it's not just a ‘box checking’ exercise. We really want that [accurate emissions data] to be valuable for investors.” Bateson explained that Ceres will soon be issuing a guide on just how helpful and instructive emissions reports can be – if completed with the right purposes and results in mind.

“Our next report is actually on this topic. How do you produce good quality disclosures that are, decision-useful and aren't just compliance? Because if the California law just results in a bunch of disclosures that [address] the letter of it, but not the spirit of it, then that's not going to be a success. We want to make sure that we get, you know, really consistent, comparable disclosure.”

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Comments: (1)

Richard Peers

Richard Peers Founder at ResponsibleRisk Ltd

Great insights thanks Scott

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