Climate change and environmental sustainability are undeniably top of mind for institutions across the financial services landscape. Whether the catalyst was the Greta Thunberg effect, the sheer frequency of extreme weather events, or merely a 2020 resolution,
a distinct change of tone has washed over the industry as financial firms at every level of the value chain step up to publicise their green allegiances.
In December last year, a union of 631 institutional investors managing over $37 trillion in assets issued a joint statement at the United Nations Climate Conference (COP25) which called on governments to ramp up efforts to tackle the climate crisis and achieve
the Paris Agreement’s objectives.
From bulge-bracket banks and asset managers, to big tech and startups in the fintech space, players are seemingly jockeying for a slot in the headlines to make sure their mantra is heard.
Yet, as Greta admonished at Davos in January, “the biggest danger is not inaction. The real danger is when politicians and CEOs are making it look like real action is happening, when in fact almost nothing is being done, apart from clever accounting and
This begs the question, is this inundation of commitments towards sustainable finance just an exercise in lip-service to the cause, born out of a fear of ostracism, or are we seeing a true gear shift within financial services?
Alex Liftman, global environmental executive, Bank of America (BofA), comments that “Significantly accelerating progress on addressing big global issues like climate change requires going beyond business-as-usual financing to find innovative approaches that
can help attract a larger share of capital from a broader set of investors.”
In January, Bank of America announced that it achieved its carbon neutral objective one year ahead of schedule. Under its Environmental Business Initiative (EBI), the bank deployed $145 billion to low-carbon, sustainable activities since 2007, with another
$300 committed to these efforts until 2030.
Liftman explains: “These efforts are driving economic value and producing innovative solutions. As we increase scale of these projects, investment risk is lowered and the cost of financing early innovations and newer sustainable business models is reduced.
In turn, this allows for greater capital flows to support more environmentally focused business opportunities.”
The world’s largest asset manager, BlackRock ($7.4 trillion under management), is another industry leader making significant commitments to the climate cause. In his annual letter to CEOs published earlier this year, BlackRock CEO Larry Fink stated: “The
evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Research from a wide range of organisations…is deepening our understanding of how climate risk will impact both our physical world and the global system that
finances economic growth.”
Fink flagged a series of issues that indicate how investors are reckoning with unknowns, ultimately concluding that “climate risk is investment risk.” The CEO lists an uncertain municipal bond market, the inability to forecast long term climate risk on lending
and insurance, how inflation and interest rates would be impacted by climbing cost of food because of drought and flooding, and a potential environmentally-inducted productivity decline in emerging markets to illustrate that environmental concerns can no longer
be distinguished from financial concerns.
The asset manager will double its sustainability-focused exchange traded funds (ETFs) to 150 and will excise companies that derive 25% or more of their revenue from thermal coal from actively managed portfolios. It will also increase sustainable asset holdings
10-fold, exploding from its current $90 billion holding to $1 trillion by 2030. BlackRock has also become a signatory to the Climate Action 100+ along with over 370 global investors with a goal to reach carbon neutral status by 2050.
But are these allocations as generous as they appear at face value?
Alongside the fanfare, commentary on the topic illustrates that a commitment to sustainability isn’t altogether altruistic and there is plenty of money to be made in the space. Goldman Sachs CEO David Solomon confirmed this in December last year when the
bank pledged $750 billion to sustainable finance-related projects over the next decade.
“There is not only an urgent need to act, but also a powerful business and investing case to do so,” Solomon wrote in a December opinion piece in the Financial Times.
The $750 billion target announced in December last year outlines a plan to deploy the figure across nine areas of sustainable investment by 2030. The bank has been carbon neutral since 2015 and last year signed the World Green Building Council’s commitment,
pledging that it will Certify 70% of building footprint through LEED or equivalent building standards and reduce energy consumption to maintain carbon neutrality.
For the sake of balance, it is pertinent to underscore the fact that despite Goldman Sachs’ lofty commitment, the bank played a key role in oil giant Saudi Aramco’s IPO last year. Solomon himself said at the World Economic Forum in Davos that Goldman would
not refuse to advise clients that are major polluters: “There’s a transition that’s going on, and my view is this is going to be a multi-decade transition where we see changes in the way people allocate capital…Should we not raise money for a company that
is a carbon company or a fossil fuel company? The answer is no, we’re not going to [stop doing] that.”
Criticism for this sustainability inconsistency is not unique to Goldman Sachs.
How is technology playing a part?
In addition to its commitment to go carbon negative by 2030, Microsoft recently announced the launch of its Sustainability Calculator which analyses estimated emissions from Azure services. Microsoft customers will therefore be provided with a better understanding
of the size of the carbon footprint their cloud workload is creating. It will also assist businesses with their carbon reporting which for Scope 3 emissions, is typically a very complicated process. Scope 3 emissions are the indirect, miscellaneous emissions
that must be accounted for across all the entire supply chain
The company has also launched a $1 billion Climate Innovation Fund to drive development of carbon reduction and removal technologies. By 2050 Microsoft has pledged to retrospectively remove all the carbon it has emitted directly or through electrical consumption
Brad Smith, president, Microsoft said “we believe that Microsoft’s most important contribution to carbon reduction will come not from our own work alone but by helping our customers around the world reduce their carbon footprints through our learnings and
with the power of data science, artificial intelligence, and digital technology.”
Major online payments fintech Stripe also announced a plan to build on its current carbon offset commitment by allocating at least $1 million per year to carbon negative solutions. By
investing in carbon capture and sequestration solutions which are for the most part being developed by startups, Stripe will further the movement toward the removal of carbon in the atmosphere rather than just offsetting the business’ emissions.
Financial institutions wield impressive capital allocations as their tool of choice to drive tech innovation aimed at promoting sustainability. Goldman for instance, is targeting $150 billion of financing and investment toward companies promoting clean and
What would be useful however, is a little more candour on the specifics of this investment criteria. There is consensus across the financial services industry that data reporting and transparency is essential to meaningful climate action, yet, when trying
to source a clear, accessible breakdown of this investment-vetting analysis the process proves a touch frustrating.
Why is carbon neutral status the must-have business bio?
Liftman, explains: “Carbon neutrality is the work of an organization to remove as much carbon from the atmosphere as it puts into it. We achieved carbon neutrality in our operations (scope 1 and 2 emissions) a year ahead of schedule.”
BofA reached this goal by reducing our location-based emissions by 52% since 2010, by purchasing 100% of their electricity from renewable sources and for unavoidable emissions, purchasing high-quality, third-party verified carbon credits. The bank also plans
to transition away from purchasing unbundled renewable energy credits (RECS) and in 2019 “we started installing onsite solar at facilities, executing long-term agreements for new wind and solar, including sleeved, power purchase agreements, and completing
tax equity owned off-site deals for new wind and solar that contribute to our goal,” adds Liftman.
Microsoft’s long-standing carbon-neutral record isn’t enough for the tech giant, Smith clarifies: “While we at Microsoft have worked hard to be “carbon neutral”
since 2012, our recent work has led us to conclude that this is an area where we’re far better served by humility than pride. And we believe this is true not only for ourselves, but for every business and organization on the planet. Like most carbon-neutral
companies, Microsoft has achieved carbon neutrality primarily by investing in offsets that primarily avoid emissions instead of removing carbon that has already been emitted.”
Who is responsible for taking the lead?
At the World Economic Forum in Davos, Mike Corbat, chief executive of Citibank, said that banks’ role is not to ensure that companies are addressing climate change by withholding
finance to polluting businesses: “I don’t want to be the sharp end of the spear, meaning I don’t want to have to be the one telling [companies] or enforcing standards in an industry or business.
“We don’t want to find ourselves being the person that dictates winners and losers. A bank’s job is to support the communities in which it operates. It is not to dictate outcomes.”
Smith takes a conflicting approach, that “While the world will need to reach net zero, those of us who can afford to move faster and go further should do so.”
While regulatory efforts are in motion, such as the Strategy on Sustainable Finance recently released by the European Securities and Markets Authority (ESMA)
or the European Green Deal, until there is universal agreement about core activities such as reporting and transparency obligations, risk analysis, ESG investing, taxonomy and supervision (among many more), such frameworks will remain fragmented and not provide
the value needed so desperately by investors and institutions alike.
This holds true for financial institutions such as BofA, despite making significant efforts to “support better disclosures and transparency of climate-related business risks” through regular analysis and reporting to shareholders and adopting global guideline
recommendations such as the Global Reporting Initiative (GRI). Problematically, the GRI is just one standard amid a raft of standards praised for their encouragement of proactive climate action, yet in their totality present a significant obstacle to achieving
industry consistency and comparability.
It is hoped the World Economic Forum International Business Council’s (draft) initiative titled ‘Toward Common Metrics and Consistent Reporting of Sustainable Value Creation’ will work toward solving this problem.
Finextra Research and ResponsibleRisk will be focusing on sustainable finance in investment and asset management at the second
SustainableFinance.Live Co-Creation Workshop in March 2020.
Register your interest for the event, where you will be able to discuss the demand for sustainability, the challenges that lie ahead for sustainable investment and
how firms across financial services and technology can achieve the UN’s Sustainable Development Goals by 2030.