It has taken a long time for sustainability to become a priority for governments, major businesses, and financial institutions. During the 2022 United National Climate Change Conference, several major banks presented interim targets for their oil and gas portfolios, measuring intensity-based emissions levels relative to the total financing of fossil fuel production. However, the same banks did not commit to reducing absolute emissions or setting net-zero decarbonization targets or deadlines. In other words, total emissions could still increase while banks achieve interim targets as long as they can expand the financing levels of their oil and gas portfolios.
While banks have been scrutinized for this reason, they have driven sustainability within their organizations in other ways. Offering various financing options and expanding access to investment opportunities to cater to sustainable efforts, offering incentives directly to consumers, and leveraging technology can go a long way toward improving sustainability practices in the banking industry.
Financing green projects that align with their sustainability goals
Banks can finance or refinance projects that exclusively promote long-term sustainability through a green loan. A green loan follows the Green Loan Principles established by the International Capital Market Association. It outlines the use of financing proceeds, the process for evaluating and selecting green projects, the management of proceeds, and reporting.
To qualify for a green loan, the borrower must present the environmental benefits of their green projects. They must also clearly define the process of assessing, measuring, and reporting said benefits. The borrower should be able to highlight environmental and social risks during project evaluation and selection. All proceeds of the green loan must be monitored for transparency. Lastly, the borrower must use qualitative and quantitative performance indicators to assess the success of the green project.
Lending to local energy-efficient companies can also further the goal of reducing carbon emissions. For example, the Kelly Bridge Community Solar Farm in Liberty, New York, received full financing support from a local green bank through a series of early and low-interest loans. This allowed the solar farm to break ground on the project and pay the loan on schedule, increasing its creditworthiness and attracting more conventional investors.
Expanding equity investments in green projects
Banks can also invest directly in businesses that aim to reduce carbon emissions. They can pool private capital into specific portfolios and create financial instruments, enabling investors to spread their investments across various green projects while reducing risk.
In 2006, JPMorgan led an initiative to raise $1.5 billion of equity ownership in wind power, adding $650 million to its own portfolio. Since then, the firm has expanded its equity investment to 26 wind farms and pursued other investment opportunities in geothermal, solar power, and biomass.
Green mortgage-backed securities also offer investors an opportunity to diversify their investments. These packaged structured financial instruments comprise buildings that meet energy-use and environmental standards. These products have a higher rating and value because of the expected operational benefits of being green.
Offering financial products and services that promote sustainability
Besides financing, banks can offer consumers a wide range of financial products and services, encouraging them to make sustainable choices. Bank of America, for example, offers a credit card that allows users to earn reward points for purchasing environmentally friendly products or using public transportation.
OneWest Bank has a green checking program that aids the reforestation efforts of the nonprofit organization One Tree Planted. For every customer who opens a checking account, OpenWest Bank pledges to plant 30 trees. Meanwhile, Bank of America rewards existing cardholders by donating Visa WorldPoints to specific organizations that invest in projects that work to reduce greenhouse gas emissions.
Banks also offer green home mortgages and commercial building loans. Citigroup implemented the MyCommunityMortgage initiative to help borrowers purchase energy-efficient homes. Citigroup has also partnered with Sharp Electronics Corporation to offer financing options for customers buying and installing residential solar technologies. The same customers benefit from access to a line of credit or a home equity loan.
Wells Fargo offers green mortgage loans to build and refinance LEED-certified commercial buildings. Meanwhile, Bank of America created the Small Business Administration Express loan to provide a rapid approval process to truck companies working on fuel-efficient technologies. The loan does not require collateral and is available with flexible terms.
Using technology to identify sustainability action areas
In 2020, Accenture published a report about the potential sustainability impact of migrating to the cloud. According to the study, cloud migration can reduce greenhouse gas emissions by 59 million tons annually. This is achieved primarily by building scalable financial platforms that can operate on the cloud, thus employing fewer servers or using more energy-efficient data centers.
Capital One, a Fortune 500 company operating one of the biggest banks in the United States, completed its migration to Amazon Web Services in 2021. Besides the benefits of increased speed, lower cost, and better services, Capital One’s cloud migration was also a step closer to achieving its goal of reducing waste and landfill contributions by 2025. Capital One also implemented a safe way to dispose of data center equipment.