Trillions of dollars are needed to finance the transition to a net zero world. But instead, trillions go into financing activities that damage the planet. Companies can use their influence as corporate customers to drive change with their banks.
Driving this change can start with taking a few key actions. That’s the clear message from the Greening Cash Action Guide that the Exponential Roadmap Initiative launched together with its partners TOPO, BankFWD and Fair Finance Guide Sweden in September 2023.
The guide explains that companies have a financial supply chain that is similar to their material supply chains. Emissions from the financial supply chain arise from how companies’ banks use their assets – including companies’ cash deposits – to finance economic activities associated with greenhouse gas emissions. At worst, a bank would use assets to finance deforestation or finance fossil fuel expansion.
The 1.5°C Business Playbook recommends that companies take action to reduce emissions across their value chains – including the financial supply chain. Exponential Roadmap Initiative member Icebug has been acting on this recommendation, Chief Financial Officer James Varkey explained in a 6 December We Don’t Have Time COP28 Climate Hub broadcast.
We’re a small company so it doesn’t matter to the bank whether we vote with our feet and switch banks. That’s why we chose the path of dialogue, a journey that we started about five to six years ago – asking the bank about its financed emissions and the targets they were setting. In particular, we wanted them to stop financing new fossil fuel extraction.
Ericsson’s Senior Vice President and Chief Financial Officer Carl Mellander said:
We have an ongoing dialogue with financial institutions. Each of us – on the corporate side and on the banking side – is trying to influence each other to work more diligently toward a better, greener future for the planet, and we each play a role in spurring each other on. But when I sit in investor meetings, I seldom get questions on our climate policies and actions. The ESG departments are very engaged of course, but I would like to see this more mainstreamed and that climate and sustainability was a part of the overall dialogue around financing topics in general, also from the equity side.
For the bank’s part, Samu Slotte, Global Head of Sustainable Finance at Danske Bank, said he, too, would welcome more corporates putting stricter requirements on their banks to drive change.
It is important that corporate customers require their bank to have a solid climate profile, but so far, only a few corporates do. Institutional investors such as pension funds tend to be more vocal.
Slotte explained there were other driving forces behind Danske Bank’s decision to quit new fossil fuel financing: the need to align portfolios with 2030 climate targets and financial risk.
Our new climate action plan set targets for our lending to different sectors such as shipping, steel and cement but also oil and gas. Of course we want to support our clients in their transition provided they have sufficiently ambitious transition plans, which for most sectors is possible to determine. But for upstream oil and gas, it’s really difficult to tell when an oil company is transitioning fast enough. Also, in addition to expecting our clients to have ambitious targets for their own decarbonisation, we expect them to set targets for their scope 3 emissions – the oil and gas they produce, in the case of oil and gas companies. So we said we would not be financing oil and gas companies that expand into new oil and gas fields.
In terms of risk, it’s not so much the credit risk in oil and gas companies that we were worried about. However, we wanted to avoid a refinancing risk that comes with the fact that we typically renew our loans to companies roughly every five years. Any company will have several banks and another bank will have to take the place of any other bank wishing to exit. But if either the exiting bank or the company doesn’t find another bank to take that place, there’s a risk the bank that wishes to exit instead has to continue lending. That’s the risk we wanted to avoid and be able to choose ourselves the point in time to exit this sector.
Financial risks and opportunities would be the decisive factors behind a transformation of the financial system, Slotte added, saying that policy had the biggest role to play.
When countries decide to phase out fossil fuels, that sends a signal to financial markets such a phase out will happen. Markets then start calculating when and how fast it will happen. Financial actors will calculate implications for their portfolios and take decisions based on these implications.
James Varkey from Icebug agreed policy and corresponding regulation was key, saying “nothing scales unless it makes financial sense. But he said customers and the pressure they put on banks were part of that risk calculation.
Carl Melander of Ericsson said customers, small and large, should use their power as customers to put demands on banks – but also to influence policy.
And then, he said, recounting a recent conversation with a large sovereign wealth fund, companies also had to put their own house in order.
The one message that came out of that meeting was to make sure to link financial value creation objectives with sustainability objectives. And I agree that you get real traction when you combine core business and financial value creation with sustainability objectives.