By Eriola Beetz, Managing Director & Partner, Boston Consulting Group
The world’s largest banks have ramped up their climate efforts considerably in recent years. From setting ambitious net-zero targets to encouraging clients to divest from fossil fuels, the sector has continued to make strides in embracing more sustainable practices. Most financial institutions have set, or are in the process of setting, targets in key sectors; however, the longer-term transition to net-zero is complex. Banks are undergoing a multi-stage journey to operationalise this transformation, and central to this will be understanding both the wider business implications as well as the growth opportunities.
Many of the banking world’s major players are keen to identify how they can play a leading role in the transition—whether by leading in key sectors or demonstrating differentiating capabilities, such as building digital tools to offer holistic solutions to one or more supply chains. However, the key to mobilising this transformation is ensuring that banks are building the right capabilities within their workforces to deliver on their green ambitions. How can they do this?
First, banks should ensure they take the necessary steps to upskill their frontlines across all segments. Relationship managers (RMs) will play a central role in driving transition conversations with their clients and activating the market. It is, therefore, incredibly important that they are equipped with the knowledge and skills to advise clients on how they can best decarbonise whilst also maximising the potential economic opportunities. Many organisations are already pushing ahead and financing some innovative green projects out of their own cash flows, but these projects never make it to market. This presents a real opportunity for banks to play a pivotal role in driving forward the green transition. Conversations with clients need to be initiated early on, and relationship managers need to ensure they are actively working to help them develop and scale the right products and market the best solutions that can stand the test of time.
To support their clients as per above, banks will need to understand, deliver and maximise the opportunities presented by transition finance. Banks must demonstrate that they can provide optimum support to clients to equip them to unlock sustainable innovation. Whilst it may be a sign of progress, simply facilitating clients in exiting carbon-intensive industries isn’t sufficient. This won’t be beneficial for the future of banking or the wider economy in the long term. Transition finance is one of the keys to delivering on net-zero ambitions; enabling clients and businesses to think through the right structures, tenors and returns will be critical if we are to fully embrace sustainable change.
And crucially, banks need to ensure they have a solid understanding of their clients’ transitional pathways and that this perception is reflected accordingly in assessments. Encouragingly, many institutions have already embarked on this journey, but it requires significant effort and clear guidelines to come into full effect. In particular, the effort required in the commercial-banking space will be significant—many SMEs (small and medium-sized enterprises) haven’t set their pathways yet, nor have they placed doing so at the top of their to-do lists in the near term. The sheer number of these businesses will require a digital tool to be part of the solution, complement human judgement and accelerate the process.
Ultimately, the transition to net-zero will require a significant investment, with the Global Financial Markets Association (GFMA) estimating that as much as $100-150 trillion through 2050 will be required. This could mean approximately $8 trillion per year in the near term. Recent Intergovernmental Panel on Climate Change (IPCC) reports have rightly called for an accelerated shift to climate finance to create a more sustainable world economy. It is here that banks have an opportunity to assert themselves—beyond being simply responsible for their own emissions and operational footprints. Crucially, banks have an opportunity to act as climate partners to individuals, corporations and governments. They can provide and channel the finances needed to invest in sustainable business models and products to drive forward the green economy of the future.
Building capabilities to understand both the opportunities and the risks associated with key technologies will also differentiate winners from losers. The banks that can set themselves apart and uncover price transitions early will capitalise and build on their market shares. Developing tailored offerings for clients will also be integral to facilitating market innovations and helping clients build their own green-product propositions. However, every segment will be different and require a distinct tack when making the transition. In retail, for instance, greater attention will likely need to be paid to developing electric-vehicle (EV) financing options, as well as offering green mortgages. Conversely, for SMEs, the focus will be on supply chains and how best banks can offer support. Central to this will be education for both clients and banks’ own frontlines—banks will need to demonstrate robust awareness of how best to offer the right products for their clientele in this shifting terrain. In addition, banks will need to invest time and resources to educate their clients on what is materially important about climate challenge—both in identifying the ways they consume or run their businesses and providing direction as to how they can make this commercially viable. Amid the accelerating threat of climate change, the advisory role of banks has never been more crucial for businesses large and small.
In many cases, these measures cannot be effective in isolation. Collaboration and building ecosystems will play an important role, for example, in incentivising SMEs to take the necessary steps to decarbonise. In fact, the Boston Consulting Group (BCG) analysis estimates that SMEs can represent more than 90 percent of the organizations in any given supply chain, holding a significant impact on Scope 3 emissions. For example, this can be done in agriculture by providing support through guaranteed price contracts and offering favourable trade-finance terms. For large corporations, the focus will be on project finance and being able to dedicate capital to emerging technologies and innovations that will drive forward a greener economy.
Digital will also be an integral capability to build—especially for SMEs and retail customers, largely due to sheer volume. To reach these clients effectively, banks will need to adopt a hybrid approach through the mediums of relationship managers and digital platforms. These platforms can include carbon calculators, climate advice and product guidance, but they can also include subsidy navigation.
Finally, maximising internal capabilities will also be critical. Safeguarding and storing climate data will be important to ensure there is no duplication and all areas of a bank’s operations are working from the same base data. Equally, analytics capabilities will need to be prioritised, particularly in a world in which standards aren’t consistent and are rapidly evolving. Moreover, attention will also need to be paid to developing credit-risk capabilities for climate themes, taxonomies and sustainability frameworks, as well as reporting and disclosures.
A significant amount of work will need to be done by the sector if it is to operationalise net-zero effectively. Beyond short-term strategical considerations, banks need to make pivotal decisions now on the areas that will deliver growth and invest in building the capabilities to deliver it. Successful banks will do both, but they’ll need to act early to hold the advantage and prevail in the long term.