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INSIGHT: Banks Need to Lead the Fight Against Climate Change

Sept. 24, 2019, 4:01 AM

Ever since the Paris Climate Agreement came into force in 2016, the focus—and challenge—has been to translate its commitments into action. That’s why I’m in New York for Climate Week (Sept. 23-29) to join with other international banks in taking action to put our collective resources and influence on the frontline of the fight against climate change.

More than $68 trillion needs to be invested by 2040 to limit global warming to well-below two degrees Celsius, according to the International Energy Agency. Governments will unavoidably bear the brunt of this massive investment, with the focus needing to be on clean energy and efficient infrastructure. But they can’t do it alone. Banks and financial institutions are the private sector group most uniquely positioned to take the lead.

Why banks must take action is clear, and it goes beyond our moral obligation as global corporate citizens and our role as facilitators of well-functioning economies. There’s another more selfish reason. Simply put: if climate change is ignored and society is forced to transition quickly later, our clients’ high-emitting assets could plunge in value (which would obviously not be good for business). For banks it’s now about the “how’”

Perhaps the most important answer to “how” is together. A significant number of international banks have now joined to place the very basis of their existence—their lending activities—at the service of the Paris goals. Following ING’s lead, four major European banks—BBVA, BNP Paribas, Société Générale, and Standard Chartered—signed the “Katowice Commitment” at COP24 last year, pledging to align their loan books with global climate goals.

The United Nations has now taken the Katowice Commitment as the foundation for the Collective Commitment to Climate Action, which 31 banks, including ING, signed up to the week of Sept. 16, just after the public launch of the UN’s Principles for Responsible Banking. These banks represent $12 trillion in loans—roughly equivalent to the GDPs of Germany, the U.K., France, Australia, and Canada.

So, how will banks put their portfolios to work in practice? By doing what they’ve always been good at: financing change. The path to Paris is essentially a set of choices about change through technology: Continue with technology that’s carbon-intensive or invest in low-carbon alternatives? A bank’s biggest impact is in what it does finance, what it doesn’t finance, and how it interacts with clients to come to those decisions—helping them to transition to new sustainable business models that will ensure their success into the future.

It’s not about only saying “no” to technologies that don’t have a future in a Paris-proof world, such as coal-fired power plants. We must continue to do that, but pure exclusion based on negative screening was the old school of sustainable finance. The ‘Paris school’ of banking also requires collaboration, dialogue and problem-solving.

As key purveyors of finance in all its forms, banks can make the difference by rewarding their clients’ sustainable and future-proof decisions and pushing back on the unsustainable and environmentally damaging ones. But doing it alone is not going to be successful—banks must work together and create an industry standard to collectively measure our portfolios, so that we can then individually steer them along the path to Paris.

Using Science to Make Better Choices

ING has been collaborating with the nonprofit think tank 2° Investing Initiative (2°ii) on a science-based measurement methodology that outlines which technologies a sector must transition to, by how much, and by when in order to keep the rise of global temperatures to well-below two degrees. It then compares this with the actual technology clients are using, or plan to use in the future. We use this information to have discussions with clients and help them make the right investment choices on their own low-carbon pathway.

To coincide with Climate Week, we’ve shared a first analysis of our portfolio with the world. We now know, for example, that while our power-generation portfolio is outperforming the market as well as the two-degree pathway, other sectors like residential mortgages and automotive still need some improvement.

Together with 2°ii and a group of other international banks, we’re testing this and other methodologies. We’re focusing first on the sectors responsible for most of the world’s greenhouse gas emissions, and as we can’t look at the cement sector the same way we’d look at commercial real estate, we’re also taking a sector-specific approach.

All the methodologies we’ve helped create are open source for others to use. Banks giving something away for free may sound like an unusual approach, especially when it is data, arguably the most valuable resource in the new digital economy. Yet if we are to truly make meaningful progress, old notions of proprietary resources and competitive advantages need to be de-emphasized in favor of partnerships, collaboration and collective action. We’re also continuously working with governments, peers, experts and other relevant stakeholders to refine these approaches and maximize their impact.

Now is the time. We call upon many more in the financial industry to join the 31 banks in the collective commitment on climate. By steering our collective lending portfolios on the path to Paris, financial institutions can take the lead in effecting meaningful change and helping to secure a sustainable future for all.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Ralph Hamers is the CEO of ING. He was appointed a member of the executive board of ING Group on May 13, 2013. On Oct. 1, 2013, he was appointed CEO and chairman of this board. Before his appointment to the executive board, he was CEO of ING Belgium and Luxembourg. Hamers joined ING in 1991.