Investors that back banks that can effectively face climate challenges could see big returns
The banking industry has several challenges associated with addressing climate change but those that excel will reap rewards.
A new study from Bain & Company shows that the banks that adopt what it calls a ‘pioneer strategy’ on net-zero carbon emissions by 2050 could see profit growth of 25-30%.
Those fast-movers will see a larger share of their portfolios move to green assets (up to 85% by 2050) and they will also enjoy a lower cost of lending than slower-moving competitors.
Those that take a weak approach, could see profits fall by 10-20% as they miss the cost advantage of the pioneers and face penalties from investors and markets for their higher exposure to traditional industries and projects.
The research modelled how a theoretical bank’s profits would fare based on three major strategies: pioneer, follower, and laggard.
Pioneer banks will take an early, strong commitment to climate transition, the followers will be less speedy and aggressive in doing so, while the laggards will take a passive approach and do only what is required by regulation.
“Banks have a pivotal role to play in limiting global warming to 1.5 degrees Celsius, and industry-wide initiatives, such as the Glasgow Financial Alliance for Net Zero, are critical,” said Camille Goossens, Bain & Company’s global lead for sustainability and responsibility in financial services.
Granular data
Ninety-five percent of banks’ overall carbon footprint includes financed emissions - those associated with its lending or investment activity – and pioneers will ensure accurate measurement of these emissions.
They will also have a long-range strategy to capture value from the carbon transition.
If the data used for measurement is not granular enough, then banks risk under- or over-estimation of their financed emissions by up to double, Bain’s report says.
“We see positive momentum on both commitments by 2050 and 2030 as well as on disclosures that are increasingly transparent and precise,” added Goossens. “However, this critical topic requires banks to invest in reliable granular data and to increasingly adopt longer-term adaptable strategic thinking. Each bank will also need to decide on the posture it wants to take in order to unlock value, asking themselves ‘Are you willing to be a pioneer?’”
