Can banks help save the world? Maybe, but they can’t do it alone.

Banks have a unique opportunity to become powerful agents of positive change via Environment, Social and Governance (ESG) principles and helping to finance the green transition. But how is this going to come about when saving the planet is no simple task (and when trying to remain prosperous while doing it)?

“It takes a village to raise a child“. This is an oft-used* “proverb”, usually attributed to a variety of African cultures (and sometimes indigenous cultures from other continents), which refers to the united efforts of an entire community of people who provide for and interact positively to enable a child to grow in a safe and healthy environment. 

Well, if the people on earth are a village (and in relative size to the universe, we are even smaller than that), then we need to come together to save our child (planet). It’s time for all the stakeholders to take action together. And for this blog, we are going to speak specifically about banking stakeholders. 

In this blog, we discuss how the role of banks is more than just providing finance to public and private entities who are then responsible for aligning with the ESG agenda. Banks also need to align their own operations to allow for truly sustainable banking. Further, banks and other financial institutions can’t drive the transition alone.  This will only be possible with the concerted efforts of the entire stakeholder ecosystem: a “village” of key players—governments, regulators, private sector, among others— working together to foster change and contributing, along with banks, to sustainability.  

Sustainable banking involves strategically planning and executing banking operations and business activities while considering their impact on ESG factors. It requires the concerted action of multiple banking stakeholders—a village, if you will—to help us all advance towards a new social and economic model. Sounds utopian? Try urgent. 

Banks are evolving in this direction. Their focus is starting to shift from green finance and financing activities that are already sustainable to how to make the essential and critical energy transition happen. 

In a bid to make Europe climate-neutral by 2050, the European Commission has rolled out landmark green legislation and aims to mobilise at least €1 trillion in sustainable investments over the next decade. Although estimates vary, according to the World Economic Forum, “Getting to net zero by 2050 will cost an extra $3.5 trillion a year.” “Transition finance” is becoming a topic as hot as our planet.

Banks’ stakeholders, such as shareholders, expect them to play an increasing role in the green transition. We believe that banks’ role is more than just providing finance to public and private entities who are then responsible for aligning with the ESG agenda. They also need to align their own operations to allow for truly sustainable banking.

It’s all about the journey to sustainability 

A recent Spuerkees blog, ‘The ESG journey and how banks can help change the world’, featured three PwC Luxembourg specialists, including Julie Batsch, Audit Partner, Banking and Capital Markets Leader. They took a look at how businesses increasingly need to prioritise ESG issues and how banks, driven by clients and regulations to become more transparent and accountable, have a unique opportunity to contribute to positive change.

As a reminder, the three pillars of ESG are:

• Environmental: An organisation’s impact on the planet;
• Social: An organisation’s impact on people, including staff, customers, and the community, but ultimately the world of people at large; 
• Governance: How an organisation is governed. 

Our focus in this blog is sustainability. So, we may interchange words such as energy transition, the global shift from fossil fuel-based energy systems to low-carbon and renewable energy sources, and net zero. Put simply, net zero means cutting carbon emissions to a small amount of residual emissions that can be absorbed and durably stored by nature and other carbon dioxide removal measures, leaving zero in the atmosphere.

But ultimately, what we are referring to is the ESG movement that is driving businesses to adopt sustainable practices, improve social and environmental outcomes, and enhance corporate governance—just to be clear on our potentially unclear jargon.

The regulatory factor 

Let’s get back to the banks who are facing increasing pressure to meet evolving stakeholder demands regarding ESG issues. In terms of saving the planet, that’s a good thing. 

Banks (as well as businesses) are also affected by new regulations, such as the European Union (EU) Taxonomy and—depending on their business model—the Sustainable Finance Disclosure Regulation (SFDR), which require banks to be more transparent and disclose their ESG-related data. 

In fact, SFDR mandates that financial institutions make certain sustainability information on their financial products publicly available and comparable. Investors can factor this information into their investment decisions and track the ESG impact of their portfolio on climate and society— something they are doing more and more. 

As for the EU Taxonomy, it serves as a standardised definition of sustainable economic activities and will become a key element in ESG disclosures. The Taxonomy Regulation will require banks in scope to disclose their Green Asset Ratio (GAR), which measures the percentage of lending to taxonomy-aligned assets in a bank’s overall portfolio.

The latest addition to the EU sustainable finance regulatory framework is the Corporate Sustainability Reporting Directive (CSRD). It will require companies in scope to disclose significant new data to the public to increase transparency and meet stakeholder expectations on all “material” ESG topics. 

To determine what is material and what isn’t, banks will need to perform a “Double Materiality Assessment” to identify both ESG factors that can affect their financial performance, and ESG factors on which the bank has an influence.

Banks are rising to their regulatory requirement, and beyond

Financial institutions are undergoing a transformation in response to ESG considerations. The motivation is twofold. First, banks—which are made up of people, just like you and us—recognise the need for a sustainable planet. Secondly, they understand that embedding ESG is essential for their industry’s survival.  

Beyond regulatory compliance, banks are expected by a growing cohort of important stakeholders to play a crucial role in financing the decarbonisation and green transition. They need to be actively involved in the entire value chain as finance providers, but also as educators and advisors to their clients. 

Helping finance a better world or decarbonisation—goals close to society’s heart— also gives banks an important opportunity to get closer to their clients, be they retail, private, corporate or institutional. 

This means they need to understand their clients’ businesses and provide transformation advice alongside financing. They also need to assess the climate risks their clients face as they may be expected to provide some of the funding to address them. 

Furthermore, banks are encouraged to contribute to societal objectives, such as supporting households with low income and promoting social development. The focus isn’t only on environmental aspects, but also on social and governance matters. 

In this way, banks can play a significant role in driving positive change by addressing the wider UN sustainable development goals. 

However, in addition to reducing the reduction of carbon emissions and mitigating and adapting to climate change mitigation and adaptation, another great challenge of the ecological transition has to do with short- and mid- term collateral effects in the social and economic spheres, such as a public debt, a change in consumption, a loss of productivity and/or jobs, amongst others. These are risks that need to be studied and considered, and the costs and collateral impacts need to be borne fairly.

This means (within our European context) that European institutions (also stakeholders) need to view the energy transition as “an opportunity to promote a context of constructive multilateralism and move towards a development model that combines climate sustainability, competitiveness, inclusiveness and social justice – a model that does not leave any group behind or any of the vulnerable regions that stand to be most heavily affected by this process of change,” said Teresa Ribera (Spanish Government) in 2019 at the 8th Global Annual Energy Meeting.

“Failing to plan is planning to fail’’**

We see there is a massive need for financing the decarbonisation of our societies, beyond banks funding their own transition. As such, states implicitly expect banks to help finance this broader transition. Of course, banks and other sources of finance aren’t expected to do this alone. They need to build strong partnerships with policymakers and their clients in the real economy. Through carbon pricing and other initiatives, policymakers can create the right framework for bankable projects in decarbonisation and other ESG initiatives.

What’s happening in our global village affects us all. Think of climate change, for example. It impacts the safety of our banking sector through physical risks, such as extreme weather events, as well as transition risks like uncertainties relating to the shift towards a low-carbon economy.

In turn, these events impact profitability and the long-term sustainability of some of the most seemingly “resilient” businesses across the globe. This poses challenges, but also opportunities for banks. As a result, stakeholders—from governments to central banks, business owners, investors, and boards—are increasingly focused on the climate change implications as a key risk to banks’ stability. This is what we want those stakeholders to bear in mind. 

We also have to figure in the changing attitudes of banking clients, particularly when you look at the younger generations, such as millennials and Gen Z. They have demonstrated a preference for ESG principles when investing—although this is slightly under attack due to current economic and geopolitical tensions.

This younger generation not only has changing values, they have money. In terms of succession wealth, we are witnessing a large transfer of wealth from the elderly to the younger generations. In fact, we noted in our 2021 PwC Banking Trends and Figures survey that high-net worth individuals are driving the ESG transformation of portfolios. So these Zoomers have Boomer money, and that makes them a force to be reckoned with. 

Banking employees are also stakeholders. No business is sustainable for long without a good reputation that attracts talent. And remember, these younger generations we just spoke about are also the people who will work for banks and organisations, and they have very different criteria when choosing a company to work for (see our blog ‘A meaningful career journey takes more than just money’). 

To respond to all of this, a number of banks are disclosing “transition plans”. These set out a holistic strategy for how they intend to manage the risks associated with climate change and other ESG risks, but also to seize the opportunities to profitably expand their support in partnership with their clients, policymakers and other stakeholders—investments in decarbonisation, climate adaptation and other ESG goals. 

If you are interested in seeing how different organisations across the financial sector and the real economy have approached net-zero transition planning, you can view this list of Transition Planning Examples.

The critical energy transition 

Look, we all have to change. But change is hard. So, some resist, which isn’t good for the child. Therefore, what to say to people who question the return on “green” investing or refute the logic of ESG? 

We have to think in the long term. Or we won’t have one. 

To bring this home, in Luxembourg, we are, for the time being, on the way to +3 degrees celsius. This means that, at the end of the 21st century, we could have ten months of drought per year and face a lack of electricity (and this while we promote electric cars). That is what we should be thinking about. 

In terms of investment, only a few months ago, leaders were asking how to preserve value and comply with new regulations. Now, they are looking to create value and sustainable externalities for stakeholders and for the greater society. This is a quick, seismic shift that speaks to the urgency of a world where it’s frequently 90 seconds to midnight. Raise a child? If we aren’t careful, we are going to burn our own village down.

Yes, ESG, climate change, sustainable investing and other such items are still being debated, and there has been a bit of backtracking. Right now, we are facing many serious mounting geopolitical and economic tensions. 

Banks and investors are battling high inflation and quite frankly, who knows what else is around the corner? This means that many banking clients and investors might shuffle their priorities. So perhaps ESG investing is likely to be volatile in the shorter term, but with a positive climb in the longer term. The reality is that there are these tensions occurring between short-term and long-term investing. It’s a journey. 

In preparing for this blog, Julie Batsch told us,  “Looking back in history, return on investment was the first relevant decision factor for clients, before risk came in as a second category. This risk/return approach has been dominating investment decisions for decades now.”

She adds: “However, going forward, the future is going to be about risk, return and impact. And if you look at the different client segments, the very high-net worth clients are the ones driving the change. Why? Because first they want to do good for mankind and they have the money to do so. But secondly, they want to invest considering ESG because they know that non-sustainable and non-compliant investments will lose them money in the long term.”

Is the energy transition important to banks or are banks important to the energy transition? 

A World Economic Forum article, published in August 2023, concluded that banks could hold the key to an equitable climate transition, recognising their potential role in this vital global endeavour, but one in which the benefits and costs must be equitably distributed throughout society. The article concluded that: 

• Climate action can bring unintended social and environmental consequences necessitating a just transition;
• Banks are positioned to aid the climate transition through, for instance, investment, accessing government incentives and funding, and unlocking new business opportunities;
• The Inflation Reduction Act in the United States and the EU’s Green New Deal, a €17.5 billion just transition fund, are key policy examples incentivising the contribution of social benefits through climate action.

As Vice President of the European Investment Bank between 2016 and 2020, Andrew  McDowell—now Partner at Strategy& Luxembourg and PwC Global ESG Lead for Banking and Capital Markets—repositioned the Bank as the “EU Climate Bank” and a pioneer among international financial institutions in green financing. 

He’s an evangelist for this type of thinking: that is, that all banking stakeholders are expected to undergo an evolution towards sustainable approaches. He also believes that the energy transition and social justice have to go hand in hand. 

There are other elements that are gaining importance also on the political side. In times of multiple crises it will be key that politicians keep the topic on the agenda and—even more importantly— encourage and empower their people for ESG-related goals in society by setting the right incentives and by using funding wisely as the days of just throwing money at everything are over. The use of that money has to be strategic, fair, equitable and sustainable. 

When the stars (and goals and values) align

We see banks playing a fundamental role. As graphically displayed in our diagramme, we believe that to achieve true sustainable banking—banking that could help save the world—there has to be an aligned village of stakeholders—clients, shareholders, funders and investors, employees, government and regulators, and society—all working together. 

In this way, we can continue to explore solutions on key topics such as financing and scaling climate technology, transforming energy demand, climate adaptation to protect value and society, and nature-positive business strategies. After all, it’s what we need to do to save our child.

Notes:

*The origin of this phrase is up for much debate and we freely admit this. 
**The phrase comes from a Blog post by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB.