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Is Mainstreaming Climate Finance a Survival Strategy for Banks?
What are the driving factors for banks to sign onto a voluntary statement on integrating climate mitigation into their workflow? Is this a competitive strategy or just a survival action? How vital is climate change in changing the banks’ investment decisions?
In December 2015, 26 financial institutions from both developing and developed nations signed a statement that contains five principles on integrating climate mitigation into banks’ operations.
In addition, three more organizations joined this voluntary initiative in 2016, including Belgian Investment Company for Developing Countries; New Development Bank; and BMCE Bank (based in Morocco).
These 29 financial institutions include multilateral development banks, international development banks, commercial banks, national and government-owned banks, and private investment companies.
An interview conducted by Clean Energy Finance Forum (CEFF) with YES BANK in India has revealed what some financial professionals’ hopes are for this initiative. It also provided a perspective from a commercial bank trying to integrate climate strategies in developing countries.
The Five Principles
The principles financial organizations have discussed in the publication “Mainstreaming Climate Action within Financial Institutions” concentrate on effective approaches learned from experience and best practices identified over the past two decades.
These financial institutions seek to enhance communication about and awareness of effective methods and approaches for integrating climate considerations. They also seek to promote the development of innovative approaches to support climate mitigation.
The report recommends the following actions.
- Commit to climate strategies
- Manage climate risks
- Promote climate smart objectives
- Improve climate performance
- Account for climate action
To better engage financial institutions with climate actions, the principles – developed based on real-life cases and experiences – are to provide guidelines for both public and private institutions globally.
The Emerging Practices Paper, developed to provide evidence to support these five principles, illustrates current climate practices and examples from a range of financial institutions worldwide, covering strategies, policies, instruments and operations.
Global Finance Needs
The report “Better Growth, Better Climate” produced by New Climate Economy in 2015 indicates that a $90 trillion investment is needed by 2030 to meet the global growth expectations. This is equivalent to an annual investment of $6 trillion.
In addition, if another $4 trillion can be allocated between 2015 and 2030, it will be possible to transition to a low-carbon economy. The report also points out that 60 percent of the financial needs will be from developing nations and emerging markets.
Progress has been made along the way. In the Copenhagen Accord and the Cancun Agreements, developed countries committed to mobilize $100 billion per year by 2020 on climate-mitigation projects in developing countries.
As of 2014, $62 billon from developed countries had been mobilized for this purpose. This was estimated by a study by the Organisation for Economic Co-operation and Development, where public finance accounted for more than 70 percent of the investment. However, the impacts of these investments remain uncertain. They must be evaluated on a case-by-case basis. The actual impact depends upon the quality and operation of governance in each country.
YES BANK
Founded in 2004, YES BANK has grown rapidly. It is also recognized as a climate-finance leader among financial institutions in India.
In support of India’s Nationally Determined Contributions (NDCs), the bank committed to mobilize $5 billion USD for climate adaptation, mitigation and resilience by 2020.
In addition, the bank also committed to fund 5,000 MW of clean energy, plant 2 million trees, increase the renewable energy percentage in its portfolio, bring safe drinking water to 100 million people, and offset the carbon emissions of its operations. This is all targeted to be achieved by 2020.
CEFF conducted an interview with Namita Vikas, group president and country head at the Responsible Banking Division of YES BANK, to discuss the bank’s climate strategy.
CEFF: As one of the very few commercial banks out of 29 members who signed on to the principles, what are the comparative advantages and disadvantages to mainstreaming climate actions into banks’ operations?
Vikas: YES BANK, in its pioneering role on climate action in the Indian banking sector, has become a supporting institution for the principles and has been playing an active role in the Mainstreaming Principles Initiative since its inception.
There are definitely advantages to being associated with collaborative coalitions such as this initiative, as they enable knowledge-sharing and peer learning of best practices.
Climate change is real and is affecting our businesses every day – and we need to strategically respond to opportunities presented which would benefit both business bottom lines through unique, scalable and sustainable strategies and ensure positive impacts for the environment and communities.
The principles serve as voluntary, non-binding and aspirational guidelines for financial institutions like YES BANK to move further in adapting to climate change and promoting climate-smart development. We hope the principles will move the needle in the right direction and also steer a global action to level the playing field.
As far as these proactive principles are concerned, we do not see any disadvantages.
CEFF: What are the major challenges in implementing the principles?
Vikas: There are no directly linked challenges in implementing the principles. However, in the underlying ethos of the principles, which entails sustainability in the entire operations of a financial institution, we can find challenges that can be categorized into four parts.
First, there is a lack of real economic demand for more sustainable practices in the financial sector, stemming from the presence of unmitigated externalities and policy uncertainties.
Second, there is not enough awareness in the industry, both from the broader financial sector and from the clients.
Third, the regulatory guidance on climate action is weak.
As a result, financial institutions don’t have a framework to assess the impacts of environmental, climate and social risks, which can be vital to a bank’s credit and operations risk exposures. These can be attributed to lack of appropriate capabilities and/or a supportive financial architecture.
To overcome these challenges, we certainly need timely policy coherence and regulatory alignment.
In recent years, the renewable energy sector is growing significantly in India because of the government’s thrust toward renewable energy and suitable policies. This is a great example of how government intervention can positively influence climate action.
CEFF: What has changed at YES BANK and other partner organizations since the signing of the principles?
Vikas: After adoption of the principles, YES BANK is playing the proactive role of sustainability catalyst and volunteered to be part of the planning group (along with HSBC, Crédit Agricole, Inter-American Development Bank, European Bank for Reconstruction and Development, Agence Française de Développement, and Corporacion Andina de Fomento). As part of the planning group, the bank helped develop a long-term vision, identify the primary work streams, define a governance structure, and devise a communications strategy.
With the work of the planning group now formally over, this phase is now being followed by a lean governance framework in the form of a coordination group that is representative of all sizes of economies and all types of member banks.
Accordingly, YES BANK was chosen by other members from the group to represent the “commercial banks in developing nations” constituency in the coordination group to take the initiative forward.
Meanwhile, the initiative has helped the bank leverage multi-stakeholder, multilateral partnerships to enhance the organization’s capacity through interaction with like-minded institutions.
CEFF: What has YES BANK learned from the network? What are the things that YES BANK most wants to learn from other institutions?
Vikas: We see the network as a platform for sharing knowledge and dissemination of emerging best practices to ensure easy replication of sustainable practices. It also serves as a platform for building collaboration among supporting institutions on areas of common interest.
Given this mutual-development focus of the initiative, YES BANK would like to increase its understanding of up-and-coming sectors. We are now recognized as one of the leading banks in India for financing renewable energy. We want to continue to build our knowledge and capacity in other emerging sectors like water management, sustainable agriculture, and smart cities.
By being part of the network, we have an opportunity to learn from the peers who can enable us to consider a foray into these sectors through enhancing our knowledge, building our understanding of inherent risks, and thus making these sectors investable in the Indian context. We would also gather insights on forward-looking approaches to strengthen our portfolio, such as climate stress testing.
CEFF: Do you think “mainstreaming climate action” is a natural decision or a forced movement? Why haven’t many other commercial banks signed on to the principles?
Vikas: YES BANK, one of India’s youngest and fastest growing banks has striven to be a part of India’s growth story and has adopted a strategic approach toward sustainability. In an effort to create a stronger and more resilient financial system, becoming a supporting institution to the principles seemed like a natural fit for YES BANK.
YES BANK’s ethos of responsible banking is one of the five strategic pillars and a key differentiator cutting across all the functions at the bank.
We have further adopted a 360-degree framework to enable internal and external stakeholders to mainstream climate action into our operations.
First, we make responsible investments through integrating environmental, social and governance parameters into lending decisions.
Second, we develop innovative financing mechanisms and financing innovations.
Third, we proactively invest in positive impact sectors.
And finally, we diversify human resources skills to include social and environmental concerns.
As far as other institutions are concerned, lack of awareness might be the main barrier for them in adopting sustainability and awareness about this initiative. This may help them become a member and contribute to both self and mutual growth.
I believe that once the initiative officially initiates work, after the completion of formation of the secretariat structure, more focused dissemination of information and achievements done in financial community would attract more financial institutions.
The 29 signatories to the principles are BNP Paribas, Crédit Agricole, HSBC, Société Générale Group, BMCE Bank of Africa, Credit Guarantee Corporation Malaysia, Industrial Development Bank of India, YES BANK, Agence Française de Développement, Belgian Investment Company for Developing Countries, Banco de Desarrollo de América Latina, Caisse des Dépôts et Consignations, Caisse de Dépôt et de Gestion (Morocco), Development Bank of Southern Africa, Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V., New Development Bank, Japan International Cooperation Agency, KfW, Nordic Development Fund, Société de Promotion et Participation pour la Coopération Économique, Türkiye Sınai Kalkınma Bankası, Asian Development Bank, African Development Bank, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank Group, International Finance Corporation, Multilateral Investment Guarantee Agency, and World Bank.