Can banks green their business in an economic crisis?
climate narratives: annotated #2
Photo by Micheile Henderson on Unsplash
Welcome to the second edition of climate narratives: annotated.
Today Europe re-opens for business with travel restrictions lifting or about to lift, and bars and restaurants opening up. While the cross-border situation remains confusing (eg France is now open for Europeans to enter, but French residents can’t travel to Spain), the hope is that Europeans will spend, eat out and make summer holiday plans.
All this against a backdrop of roiling social unrest, economic malaise and fears of a second wave of infections. The “economy-first” narrative is now front and centre, and we’re moving from the emergency, short-term perspective to the medium-term.
As politicians rush to polish their legacy and secure their political future (French President Macron appeared on TV last night with a signature show of emptiness promising a new policy of “independence” embodying solidarity, ecology and a string of other immediately forgettable buzzwords), the rest of us have a long way to go before we can spend, invest and take business risk with any degree of confidence.
Consumer spending and saving, corporate debt, private sector investment - all this hinges on the confidence in the banking sector, a sector which has been coming under greater scrutiny to green their business and to move beyond performative commitments.
Are we on the threshold of an era of green money? In this newsletter, we take a look at the banking sector, at increasing calls to green their lending, the current crisis context and the imperative to close the gap between words and deeds on responsible, inclusive capitalism.
From the podcast
In case you missed the latest episode of the podcast I talked to Daniel Klier, Global Head of Sustainable Finance at HSBC . In this insightful conversation we talked about whether the pandemic was a breakthrough moment for sustainable finance and how we need to unleash a mass movement to kick-start demand for retail sustainable finance. Daniel cuts through a lot of the jargon that clings to the subject and offers a clear overview of what’s working and what’s not in sustainable finance today.
More resources and articles from all guests are available via the website climate narratives.co.
Green and sustainable finance highlights
This month's highlights focus on the role that the banking sector could play in the energy transition. The margin for progress is huge: a recent report from UK charity ShareAction showed that only 35% of European banks have a Paris-aligned strategy.
What’s the business context for banks right now? In June 10 remarks at an online seminar, European Central Bank Executive Board Member Isabel Schnabel warned of “the risk of COVID-19 leaving a deep footprint on growth and inflation in the euro area.”
Evidence is increasingly pointing towards a protracted impact of the crisis on both demand and supply conditions in the euro area and beyond.
Financial distress of firms and households will cause the share of banks’ non-performing loans (NPLs) to rise over time, weighing on bank capital and potentially clogging the bank lending channel of monetary policy.
Although euro area banks as a whole have entered this crisis in comparatively good shape, the experience of past crises highlights that vulnerabilities in the banking sector, if not addressed early enough, may severely slow the pace of recovery and leave long-lasting damage.
Top of my reading pile this month was a brilliant report from Brussels-based advocacy group Finance Watch called “Breaking the climate-finance doom loop”.
It recommends that banks should be legally required to have much higher risk weightings on all loans to oil, gas and coal companies, thereby re-classifying the risk profile of fossil fuel investments at the same level as other high-risk lending like venture capital and private equity.
👉 The report shifts the narrative from a passive focus on disclosure and measurement to a pro-active stance based on regulatory change.
This lifts the discussion above the typical frustration of panels on quantifying climate risk where talk runs in circles until someone in the room, usually a central banker, declares: "More research is needed."
So what is this so-called doom loop?
Bank lending is the main enabler of fossil fuel exploitation, and fossil fuel exploitation is itself the main enabler of climate change....We are now facing a situation where bank lending threatens the very existence of banks: this is the climate finance doom loop.
The report argues that the current approach is insufficient as it "puts too much stress on disclosure and measurement and not enough on regulation" and is based on the premise that increased transparency and better information will lead actors towards making decisions that will benefit the public interest.
Policy makers recognize the near impossibility of modelling climate-related risks but say they need such modelling to be done before intervening. Unfortunately, given the short time available, late action is equivalent to doing nothing.
The reality of sustainable finance today is that it does not allocate capital to a sustainable economy but to the already sustainable fraction of the economy, or the fraction of the economy on its way to becoming sustainable. The difference is enormous.
The only way to make private financial institutions take into account the public interest is for public authorities to edict rules that will force private actors to change their behaviour.
Inertia in banking runs deep and multi-layered
A commentary from independent analyst and ESG expert Raj Thamotheram entitled "Long Term Matters: Time to apply pressure to banks" in the June edition of IPE (Investment and Pensions Europe) argues that it's too simplistic to label big banks, insurance companies and asset managers as part of the problem.
He offers a more nuanced narrative.
Consider these giants as the smallest doll in a set of Russian dolls, encased by layers of other dolls each with their own inertia to change.
👉 The challenge here is how can each actor in each layer overcome their in-built inertia and let go of the you go first default.
Starting with the first layer, institutional investors, he asks:
How do investors contribute to the problem? They send contradictory sustainability and corporate governance messages. They reward executives for doing the opposite of what the climate crisis demands; they approve boards and CEOs that lack the diversity to manage the big changes ahead; and they turn a blind eye to corporate political influence. A recent example: banks co-ordinated internationally to lobby for a delay to climate stress tests, and the Bank of England caved in.
The next layer, ESG trade bodies:
They normalise the climate agenda and make collaboration easier. But they also give reputational cover to laggards and this ultimately holds back change.
Actors in each layer are responsible for addressing their sector's own immunity to change. There is no magic bullet and there is no time for sequential change - everyone needs to act simultaneously.
Risk of relying on “momentum-building” as a theory of change
International climate politics since 2015 have become increasingly performative and reliant on “momentum building” and feel-good tropes. If this feels familiar to anyone working in green finance, don’t miss this recent paper that nails what’s happened in that space with the term “incantatory” governance to describe the feel-good dynamics that now dominate the international climate regime.
The co-authors explain that the trend since the Paris Agreement has been away from a regulatory approach and towards a ‘catalytic and facilitative model’ of global governance, which can be summed up as a culture of feeling good.
…the post-Paris process conveys a central role to the emission of ‘signals’ and the creation of ‘momentum’ for climate action, through carefully orchestrated global moments such as the One Planet Summit and Climate Action Summits and highly publicized private initiatives like #WeAreStillIn.
👉 The main influence behind the change in these UN-led processes has been “neo-managerial tools and techniques”.
Starting from the 1970s, when the appearance of transnational production chains gave rise to more diffuse quality management systems centred on goal-setting, reporting and auditing. Followed by the rise of corporate social and environmental responsibility (CESR) schemes which rely on similar processes of pledging, reporting and review. These methods seeped into the climate governance space through such CESR partnerships with NGOs, think-tanks and international organizations.
In this new governance, performances, symbols and narratives appear to be just as important as the production of rules, institutions and instruments.
Beyond the recording
This is a regular feature where we look behind the scenes at the process of creating our New Climate Capitalism podcast, the resources that informed our conversation and what happened next.
What happened after episode #3:
In episode #3, I spoke with Daniel Klier of HSBC about the potential of this moment to boost the green finance movement.
Since we spoke in mid-May, the world has convulsed in a shared anger at the death of George Floyd and the ingrained, systemic racial injustice it represents not only in the US but around the world. As protests gathered to push for change under a global call that Black Lives Matter, Hong Kong residents were also in the streets for a different cause.
On June 3 HSBC publicly backed a controversial new security law China is seeking to impose on Hong Kong, seen as a contravention of the “one country, two systems” principle which was to have been in force for 50 years after the 1997 handover of the then British colony. This move has unleashed critical comments that spilled over in the form of comments on our podcast Twitter feed last week.
What this controversy unexpectedly highlights is the emergence of a new frontline for responsible capitalism. A commentary in the FT signed by its Deputy Editor, Patrick Jenkins, on the Twisted logic of backing both George Floyd and Xi Jinping, observes:
To take the moral high ground, as many corporate interventions in support of George Floyd have, invites criticism of corporate behaviour that is less ethically admirable.
Reconciling fragmented stakeholder interests makes life more complicated for companies, given that those stakeholders may range from woke staff and ethical investors to authoritarian governments.
Corporations are not the only ones facing tough calls on moral issues: newsrooms across the world are seeing an upsurge of bottom-up demand for a more explicit, activist stance in their reporting. This opinion piece from two Canadian journalism professors, Candis Callison and Mary Lynn Young, lays down the challenge:
Instead of business as usual, journalists need to set aside their long love affair with objectivity and learn to locate themselves in terms of their social histories, relations, and obligations. Journalists need to recognize that what they think happened is deeply related to who they are and where they’re coming from in broad and specific senses.
Further, journalists need to employ what we term systems journalism that covers events and issues not as one-offs, but as intersections of societal systems and structures that have histories. And this means investigating histories many weren’t taught and don’t know.
As a former financial journalist from Hong Kong, one who covered the story of the HSBC takeover of Midland Bank in the 1990s that led to the globalization of the brand, I can honestly say that I find it confusing and challenging to unpack the multiple layers of symbolism, identity and colonialism wrapped up in the legacy of the former Hong Kong and Shanghai Banking Corporation, a quasi-central bank that issues bank notes and has always been a bit more than a bank in the popular imagination of those who lived in British Hong Kong. The work of responding to the challenge from Candis Callison and Mary Lynn Young is only just beginning.
What’s next on the podcast
Next episode, we're excited to be talking with Wolfgang Kuhn from ShareAction, the UK charity that co-ordinated a shareholder resolution in May at Barclays bank to curb lending to fossil fuel companies.
From the Gers, France,
Denise