Long reads

What does net zero mean for banks?

Madhvi Mavadiya

Madhvi Mavadiya

Head of Content, Finextra

Earlier this month, I moderated a panel hosted by Cogo on how banks can play a more urgent role in the transition to net zero. The webinar was hot on the heels of COP27 and while all the developments over in Egypt were still front of mind. However, despite many discussions at the event this year, we cannot ignore the fact that the policies that were borne out of COP25 are yet to be finalised. What is clear is that sustainability cannot be achieved overnight.

What COP has shown is that we cannot rely on the action of governments alone, we need financial institutions, businesses, and individuals to collaborate. That’s exactly why the team at Cogo, who partner with banks to help customers measure, understand, and reduce their carbon footprint gathered three experts from three different industries and businesses to discuss how together they can play a more urgent role in the transition to net zero.

I was joined by Paul Watchman, legal adviser for UNEP Principles of Sustainable Insurance Net Zero Insurance Alliance; Gary Kendall, head of climate strategy implementation at NatWest and last but not least, Jonathan Ward, senior carbon impact manager at Cogo.

How can financial institutions reduce carbon emissions across the economy and society? This question is what gets Gary Kendall out of bed every day. He highlighted how although the question is broad, we must remember that “banks operate within a system of rules, incentives and regulations that aren’t always aligned with the objectives of societal interest and that’s certainly the case here. What we really need to think about is how we bring about system change at quite a deep level.”

Kendall added: “We can tinker around the edges and there’s plenty that we can do to finance this, that or the other, or technology or companies that are committed to net zero targets. But in the end, we are talking about some pretty profound system change and the rules of the game need to change to become in register with the overarching objectives. How do we take our socio-economic system down to net zero by 2050? Not only the destination is important, but the trajectory is also important.”

But how can this be achieved? It is evident that there are multiple systemic challenges, not just carbon. We cannot solve every problem that exists and persists by tracking how much carbon is emitted. “We have an economic system in an ecological overshoot while it’s failing to meet universal human needs,” Kendall mentioned.

In Watchman’s view, considering the scale of change that has occurred, one of the things that banks can do is “look at their internal values and the inside-out problem in the first place, look at where their carbon footprint is.”

Watchman agreed with Kendall that yes, we are in an economic system that has rules, but that is changing now. “We’ve gone from a shareholder-dominated model to one that’s about stakeholders, communities, and impact. Banks are very important influencers, not just in terms of money, loans, and bonds, but also in terms of thought leadership.” As he said, banks can move the dial; moving it from the inside is easier than from the outside.

While Kendall and Watchman explored the enablers and blockers to change, Ward emphasised the importance of considering the role of financial institutions within the wider economy. In addition to this, against the backdrop of the multitude of standards and disclosures that banks must keep pace with. Ward said that we must look at where the levers are and what banks occupy in the transition to net zero.

“We have this ultimate need to mobilise finance and decarbonise our assets, products, and services – whether that’s domestic or the commercial side – shifting away from fossil fuels. We have many assets that are shared in terms of the stake and the exposure between customers and banks. We need to increase the finance and the demand towards those businesses that provide low carbon products and services. We need to understand our impact as consumers, as small businesses and enterprises upon climate and broader impacts of consumption on the environment. That means becoming carbon literate.”

Providing a solution and an action plan for financial institutions, Ward stated that there needs to be “transition plans because this is a major transformation built around people, places, and businesses. We need to act before compliance comes in. We need to become more climate ready. We need to connect the supply and demand signals and people and businesses need options to change.”

In a concluding statement to this question, Ward summarised this point by saying that the “relationship that banks have with consumers and small businesses is one that we can start to utilise as holder of key information, as a financier, as an advisor.”

Watch the webinar here.

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