Financial institutions struggle to align with carbon neutrality

Net-Zero Asset Owner Alliance, Net-Zero Asset Manager Alliance, and more recently, Net-Zero Banking Alliance are among the many banks, insurers, management companies, and institutional investors increasing their commitments and initiatives around carbon neutrality. However, according to CDP’s report entitled "The Time to Green Finance", there is still a long way to go. The non-profit surveyed more than 330 financial institutions to learn about their climate practices. Only a quarter of those surveyed publishes information on the emissions generated by their financial, investment, or insurance activities.

This is a very low figure, considering the CDP estimates that these activities - which comprise scope 3 emissions for financial institutions - emit 700 times more greenhouse gases than their direct emissions. Nevertheless, some institutions are showing interest in aligning their portfolios with the Paris Agreement objectives, but they are far from representing the majority. At present, 45% of banks are committed to aligning their loan grants with climate objectives, while 48% of institutional investors and 46% of management companies are working on their investment portfolios. However, only 27% of insurers do so for their insurance underwriting business. Overall, insurance companies are more likely to consider climate risk in their investments rather than their underwriting.

One of the pitfalls identified by the CDP is that financial institutions prefer to focus on market opportunities related to economic transformation, rather than risks. To achieve carbon neutrality, however, both must be addressed. As evidence, 76% of financial institutions are interested in sustainable financial products, such as sustainability-linked loans or green bonds; products for which the market has increasing supply. In contrast, few banks consider the risk of climate-related credit default (35%) and many investors seem to ignore the risk of stranded assets (26%).

Changing the business model

It is clear that banks and investors are positioning themselves in favor of green projects - which are increasingly profitable - but they still refuse to abandon high-emitting activities. CDP emphasized in its report, "there should be focus on both the opportunities and risks in financing portfolios to ensure that we achieve not just green finance, but also finance as a whole becoming green".

However, financial institutions are positioning themselves around different business models by taking into account the impact of financing. The Netherlands-based Triodos Bank, which joined the recently established Net-Zero Banking Alliance provides full traceability of the activities it finances. It measures and publishes the carbon impact of its investments and the credits granted, particularly by supporting the Partnership for Carbon Accounting Financials (PCAF).

Neobanks are also emerging in Europe by adopting a model of transparent financing. In France, Helios Bank was launched at the end of February with a promise to its customers that their deposits would not fund activities that are harmful to the climate. This type of offer seems to appeal to a new clientele; one that is keen on understanding how their money is managed. In its two months of existence, Helios Bank has recorded 6,300 requests to open an account and reached €1.1 million in bank account deposits. This is a great first step for the young bank, but a sign of the growing demand from end customers for climate-friendly finance as a whole.

Arnaud Dumas