By Hacina Py, Chief Sustainability Officer, Société Générale Group
When considering the economy’s development over the past 50 years, the best we can say is that it has not been sustainable. Seventy percent of biodiversity has been lost; we use the equivalent of 1.7 planets a year. Global warming is not just an idea; it is visible everywhere, with dramatic consequences for people, especially in less-developed countries. There is no doubt that this chapter has to end, and the present decade is crucial if we want to give the Paris Agreement a chance.
The current chapter is coming to an end
Fifty years of tremendous developments (some positive, some superficial) have undoubtedly improved living conditions in many countries. But they have also turned our (consumption) society into a disposable world with a simple algorithm: produce, use, dispose of. Produce far away at low cost, transport long distances at low cost, purchase at low cost, use for a short period and dispose of at no cost. But was it really at low or no cost? Considering the consequences linked to the negative externalities of the various actions through these “value” chains, we can no longer afford the further development of this economic model.
The next chapter is not a greener version of the previous one
We have a global budget of 420 gigatonnes (GT) of CO2 (carbon dioxide) until 2050 for a 50-percent chance of maintaining global warming at 1.5 degrees Celsius (°C) and consumption at just below 35 GT annually—the economy’s transformation has to be extremely fast. The International Energy Agency’s (IEA’s) NZE’s (Net Zero Emissions by 2050 Scenario’s) 1.5°C shows a succession of technical and industrial transformations at a pace rarely seen before. From a financial institution’s perspective, if you look at it positively, this is a once-in-a-generation opportunity to finance new capex (capital expenditures) and new activities of impressive magnitude.
We need to rethink the production modes and, even more importantly, the consumption modes. For banks, already active in facilitating the decarbonisation of the most carbon-intensive industrial sectors, the big challenge (and the big opportunity) is also for their retail activities. To align with the Paris Agreement (if we take the example of France), we should live with a two-tonne CO2 individual annual footprint by 2050, compared to 10 tonnes in 2022. This is not a small adaptation; it does not mean that brown assets will be switched to green ones, ensuring business as usual or life as usual. It means a very different diet (and agriculture), new mobility habits (not based on individual cars), new consumption patterns (forget about fast fashion) and energy-efficient houses (with fewer square meters [sqm] per inhabitant).
This new chapter is almost a new book: We face a new paradigm.
Rethinking our production modes
The best way to optimise resources is to reuse them, so a circular economy should be one of the keys to this new paradigm. It starts with the right design and a holistic approach to value chains. Local territorial organisations must favour industrial sites that generate synergies between their actors. Save resources, save energy, and think local.
Banks will invent new financing solutions for this circular economy, the drivers of which are very different from the usual linear production. Circularity brings an interesting risk equation, as it will help build resilience and strengthen local economies.
Likewise, the best energy is the energy that is not used, so energy efficiency and sobriety will become routine. Concerning power generation, we’ll see the growth of decentralised units (such as solar mini-grids) and fewer large power stations financed by megaprojects. Decentralised generation will make it easier for underserved populations to access energy and improve resilience in economies that will boost electrification rates. However, banking models are based on decades of past performance; hence, creativity can be capital-intensive, putting pressure on profitability. Risk appetites must also be adapted, as decentralised generation is about new actors, small actors and mini loans that shall be standardised, aggregated and distributed—far from business as usual for big-project financiers.
Optimising usage
Operating within the planet’s boundaries will require sobriety and optimising resources. Replacing fossil fuels with renewable energy and switching each thermal car into an electric one is not going to be possible, considering the insufficient available resources.
Switching from ownership to usage to optimise the use of each item produced is probably one of the keys to this new paradigm. Sharing cars, sharing objects through leasing, sharing square metres in residential buildings for extra rooms, renting industrial equipment or even paying per use to optimise costs and maintenance through the value chain—these are all concepts that, in the end, will ensure the end consumer benefits from the goods and services he or she needs. A new business model should be considered for each asset acquired to be used less than 10 percent of the time (and this list is quite long). In fact, if we acknowledge that what is important is not to own and store a collection of assets but to move from A to B reliably and affordably or to enjoy the use of a given piece of equipment if and when we need it, then switching to a functional economy should be possible. Digitalisation is a great enabler to perform this optimisation and ensure simplified access to goods and services.
Changing mindsets
The transition must be acceptable—some would say desirable—which is not a given. The influences of narratives on our brains and behaviours are more important than they seem. If you have been raised with the belief that you will be successful and happy if you possess big, new cars, regularly fly for city trips on the weekend, acquire new clothes many times each year and purchase the latest fashion items from all over the world, some adaptation will be necessary. But it may not be that difficult. It has been observed that over the past decades, we have been buying with money that we did not have the things that we did not need to impress the people who did not care. Time to switch!
It is clear that advertisements need to evolve, and new narratives compatible with the new paradigm need to emerge to facilitate change.
We are now familiar with the work of the IPCC (Intergovernmental Panel on Climate Change) on climate; we welcome the work of the IPBC (International Panel on Behavior Change) as human sciences will help decrypt the drivers for change.
Have we made any progress so far?
Yes, some progress has been made, partly due to unexpected events. The COVID crisis, which was dramatic in many aspects, also had some unexpected positive outcomes, such as remote work reducing commuting, video conferences replacing long-distance flights, reductions in fast-fashion addictions, renewed social connections and new habits of buying locally. The energy crisis has also increased interest in home energy-efficiency innovations, such as solar panels and heat pumps. In addition, inflation has triggered the need to save money, and the practice of buying second-hand clothes and appliances has grown in popularity.
We cannot, however, count on a succession of crises to force us into a lower-carbon economy through constraint. We need a plan—a long-term plan—with a 360-degree view and strong cooperation between the different economic actors.
What role are banks expected to play in this new paradigm?
Banks can do much to contribute to building this new, sustainable world with their clients. Their role is much wider than simply channelling financial flows. Trillions of euros are expected to be invested annually to fuel the transition. This cannot be business as usual: Some activities will need to be reduced or even stopped; some will have to be accompanied by decarbonisation action; and others will have to be invented.
Banks are invited to extend their risk appetites and onboard new actors—some of whom will become the champions of the low-carbon economy. Banks can play a role in designing solutions that will help their clients adopt new habits, such as switching from ownership to usage, for example. Rightly designed financing solutions can be a good nudge.
Banks must widen their scopes of action with equity investments—in emerging champions, new technologies and projects to restore nature. They must organise themselves across sectoral value chains and expand their expertise, as the transition involves technical knowledge.
More than that, banks have roles to play in training and reskilling not only their staff but also their clients. They can also create ecosystems of partners to accompany clients in their transitions. This is a big shift. But it is mandatory for a bank that wishes to remain relevant to its clients in the new paradigm.
Frightening? No, it’s exciting! Let’s shift now.