2022 Review/2023 Preview
Foretelling the Future Climate of Banking
As we close 2022 and look ahead to 2023, we are invited to contemplate the ‘future’ and what the events of the last year might mean as we look ahead. But when we think about ‘future’ which aspects are we thinking about?
Do a quick internet search for the future of banking and you will see most references to trends in digital banking to become ‘future-ready’ – mass customisation, faster payments, digital wallets, smart contracts, faster payments, integrating big data and artificial intelligence. Did we mention faster payments?
Digitalisation can feel like the rapids of a fast-flowing river, sweeping up change management teams into a constant stream of efficiency-seeking optimisation projects. It’s understandable that it can occupy so much attention – there’s so much data; so many variables and competitors to compare; so many more improvements that could be made if we just build these changes into our next software release or app upgrade.
But could this whirlwind of attention on becoming ‘future-ready’ be blinding banks from the future world they need to be taking into account? Every day, when a bank makes a loan, it performs a magical process that turns short-term deposits into long-term credit in a process known as maturity-transformation. This works on the basis that short-term depositors are reassured by the trust in the long-term prospects of borrowers (credit being based on ‘trust’, from the Latin ‘credere’). But that trust is now being predicated on a future that we are increasingly aware will take place in a world less familiar than the one we have today. The conditions we have taken for granted have included a stable climate and intact biosphere that enabled our societies and economies to grow. The financial system, in turn, has been fed by this growth and is now estimated to be around a quarter of the entire global economy. Its future stability is predicated upon the continuation of the conditions that delivered its size and position in the today’s economy. Yet, we know that those conditions are collapsing.
What does climate overshoot really mean for banks?
Global carbon dioxide emissions from fossil fuels are projected to increase by 1% in 2022, hitting a new record of 37.5 billion tons. That’s after the UN’s scientific advisors said back in 2019 that we needed to cut emissions by 7.6% per year every year until 2030. If we had followed that trajectory, then global carbon emissions would have fallen by around 20%; instead, they’re stuck stubbornly at the same level. The carbon budget is being used up and the climate clock is ticking down. We now have a mere 6 years, 7 months until the 1.5-degree limit is breached. That takes us to the summer of 2029.
What does acting with more urgency mean? If we made global emissions reductions that caught up with the 50% reduction by 2030, we’d need an even greater rate of reduction in the following decade. It’s this context that leads many to conclude that ‘transition technologies’ only are fit for purpose if they have a clear path to reduce emissions all the way to zero rapidly, rather than just being better than what we have now. Because what we have now is clearly unfit for purpose and no longer a useful indicator on which to base our judgments.
It’s precisely this projection of what we would really need to do in order to keep within a 1.5-degree Celsius carbon budget that lead many to conclude that ‘1.5 is no longer alive’. After COP27 failed to reach agreements on further emissions reductions, hopes have receded to the point that most commentators now believe we will enter into ‘overshoot’ to some degree and still have a high likelihood of uncontrolled climate change. But the concept of overshoot doesn’t psychologically represent the likely phenomena accurately. It’s not like stepping into a road and then pulling yourself back to safety by retracing your footsteps’; it’s stepping off a fragile cliff-edge that is likely to trigger rocks, big and small, to start tumbling at pace. According to the IPCC, many of the planetary physical boundaries, once breached, would take centuries or millennia to reverse. Humanity has made astonishing technical progress, but we’re not placing our trust on putting Antarctic glaciers back – at least not in our lifetime nor in a timescale that prevents the consequential damage.
The reality for banks is that maturity transformation – that ability to transform short-term deposits into long-term loans – now means crossing the border from the world we have known into an unfamiliar territory of future planetary instability. It’s a world where the flood waters have driven the reinsurers away which in turn sweep out the insurance that mortgages rely upon. It’s a world where successive droughts undermine the possibility of agricultural finance for crops. It’s a world where climate damage in the most vulnerable countries increases the risk-based costs of capital, making investment into adaptation even more out of reach. The trilemma of ‘mitigation’ vs. ‘adaptation’ vs. ‘loss and damage’ start to blur as we consider how all future mitigation measures need to integrate adaptation. And that funding for recovery might not be able to occur in the same place as the loss and damage when those regions are too fragile to be restored.
Some bankers and commentators look for the evidence of the losses in the data sets we have today. They conclude that since there’s no evidence in the past, and no publishable data from the future, then there’s no reason for concern. Comparisons are drawn on the basis of past performance between investments which are predicated on widely divergent views of the future. This is a form of denial whose reassurance is waning.
What we are experiencing now as we deepen our understanding of the impacts of extreme weather events, floods, forest fires, droughts and planetary boundaries being breached, including freshwater and 68% of global biodiversity lost in the past four decades, is an example of ambiguous loss. This is defined as a loss that occurs without a significant likelihood of reaching emotional closure or a clear understanding, leaving a person searching for answers often resulting in unresolved grief. It is also likely to lead to a breakdown in trust. When this breakdown in trust reaches a tipping point, then it spells disaster for the ‘credit’ that banking is built upon. Simply put, what is the rationale for ‘trusting’ that the long-term will be kept safe when we see mounting evidence that stabilising conditions are being undermined and are collapsing around us? Sudden breakdowns in trust trigger financial crises. In the global financial crisis of 2008, there were institutions who would protest that they had a robust business which was fit for the future, days before being declared bankrupt. The breakdown of trust based on planetary stability will be more universal. The ‘bailout’ would only restore trust if the fundamental principles and design of the financial system and institutions were redesigned.
Managing long-term strategy in a complex and uncertain world
Some argue that the actions institutions are taking today will keep us safe. But there appears to be a pitfall in confusing initiatives with initiative. There has been a proliferation in new alliances, accords, frameworks, principles and initiatives. Many have been helpful in contributing to driving change. But the remedy will not be found in having more of them, but rather in ensuring that they drive the outcomes that they were intended to deliver.
Given the evolution of the global emissions in the past few years and the necessity to transition even faster, then we may need to look at bringing forward transformation. The Cambridge Institute for Sustainable Leadership offered a vision of what a sustainable bank would need to look like by 2030 (see below). Given the trajectory required to pursue a climate-safe world, then perhaps this model would need to be implemented by banks in the next strategic cycle 2023-2025.
Considering scenarios of the future can lead to violently different pictures of the world we experience today. We’re already stuck in a world of permacrisis, longing for a return to normality, barely able to maintain reliable sources of information to make sense of our world. How can we cope with the future volatility and fragility ahead?
I was recently invited to speak to the School of Systems Change about Strategy in a time of Complexity & Turbulence. I will share three insights from my own reflections (as a previous Director of Corporate Strategy):
Never let a mini-crisis go to waste: When things break there’s a certain freedom where people need not be intimidated about doing something wrong. This often presents a real opportunity to make fundamental shifts. The question is how to disrupt the tendency to go into ‘disaster-recovery mode’ and only deal with the immediacy of the crisis, and overlook the potential that the rupture may have for deeper level change. It need not even be something which ‘breaks’ – even the frustrations of having to incorporate another piece of regulation or change to data structures, can present opportunities to redesign organisations in meaningful ways.
Embody Finance as a ‘verb’ rather than a ‘noun’: The more that bankers describe themselves and others describe them as ‘providers of finance’ it reinforces the commodification of the ‘activity’ of financing. In the emerging future, the elements of finance (as a verb)- include being data aggregators and sense-makers, client sounding boards and advisors, network conveners and market-shapers, policy influencers and sector champions, solution providers and strategic partners – become much more important.
Break the cycle, Bend the Axes: A common dilemma we often hear is that there is a massive ‘funding gap’ whilst at the same time there are too few positive things to invest in. The key insight is that the financial sector is not a neutral observer. When the bank has policies, processes and products that are aligned to support positive impact it can amplify economic activity in that sector. The knowledge capital built up by banks contributes to what economist, Paul Romer, called Endogenous Growth – growth driven from within. This changes the frame for transition. Rather than concluding that ‘we tried that and it didn’t work’, banks can realise that it is the ‘trying’ that can make something work economically. Banks can work to reframe the potential of positive impact - from being in direct opposition to financial outcomes (where only compromise is possible), to bending the axes to enable business models that succeed through their positive impacts.
The future will be different. There is a growing certainty about the trigger points that a beyond-1.5-degree Celsius world will mean for us all. We can’t wait to experience it before we make the necessary changes. We need real leadership at multiple levels in banks to transform the potential we hold today into a sustainable future we can trust.
Credit: Cambridge Institute for Sustainable Leadership, Bank 2030: Accelerating the transition to a low carbon economy (Jan. ‘20)
2022 in Review
Together, with senior leaders and changemakers from across the global financial system participating in the Climate Safe Lending Network, we’ve made greater strides over the past 12 months towards accelerating the decarbonisation of the banking sector and real economy. We kicked off 2022 by convening sustainable finance professionals - including bankers, investors, academics, civil society leaders, regulators, and policy makers - to collectively explore what it will really take to reach net zero and deliver a fair share of the 50% emissions reductions needed by 2030. Participants identified key topics that are critical for aligning lending with the goals of the Paris Climate Agreement and a just transition, which included: advancing a new narrative of purpose-driven banking, going beyond carbon to develop climate-safe transition plans, and leveraging the collective agency of clients to influence banks to adopt net zero/Paris-aligned lending practices. These topics have informed the work of the Climate Safe Lending Network for the remainder of the year and serve as the basis for moving innovative ideas for catalysing systems change into action.
Below we share highlights about key accomplishments made in 2022, which include:
Providing practical guidance to bank transition teams for moving from planning to practice
Creating a supportive policy environment for capital rules change
Engaging business leaders in reducing greenhouse gas emissions generated through corporate cash and investments
Supporting banking professionals in developing the knowledge, confidence and skills to successfully influence their institutions in taking bolder climate action
In taking stock of these achievements, we’re also mindful that there is more work to be done to bring about a climate-safe world — one in which the trajectory of lenders’ activities are fully aligned with a 1.5-degree Celsius world. In the final section of this annual report, we provide a preview of our plans for the new year. We hope you’ll join us in taking forward the collaborative initiatives described in this report.
Taking the transition to net zero from planning to practice
A key focus of the Climate Safe Lending Network involves supporting banking institutions in developing dynamic and transformative climate strategies. With increasing attention being given to the development of credible strategies for financing the transition to a net zero economy we took our strategy guide, The Good Transition Plan, published in 2021 for COP26, a step further by developing a suite of free strategy tools to help facilitate strategy conversations within banks’ management teams as well as with their boards and stakeholders.
As part of building on the crowdsourced wisdom of The Good Transition Plan, we adapted our model to align with the GFANZ framework for financial institution plans. This suite of free strategy tools consists of:
An addendum that summarises new developments in transition planning since the publication of our original strategy guide
A transition plan strategy toolkit that offers practical guidance for putting robust climate strategies in place
The Pledge, a bank stakeholder simulation about bank climate targets
Since publishing these transition planning resources, we’ve heard from banking professionals participating in the Climate Safe Lending Network who will use them as part of their process for putting climate banking strategies in place:
“This is an excellent document and provides comprehensive guidance for banks. I will definitely be making use of it.” -Wendy Dobson, co-chair of the UN Principles for Responsible Banking, Sustainability Director, Standard Bank (South Africa)
“Super – I can use this beyond what it is originally designed for, so it will be a treasured resource. I plan to take our CSO through it next week.” - Senior bank executive
Getting tougher on buffers
Voluntary action by banks is critical for managing climate risks and transitioning to an economy that is aligned with the goals of the Paris Climate Agreement; however, voluntary action is insufficient on its own if our goal is to decarbonise the banking sector before our remaining carbon budget is expended. The convening we hosted in February 2022 on ‘picking up the pace’ to reach net zero and deliver a fair share of the 50% global emissions reductions needed by 2030, reinforced the existence of a consensus across the global banking sector that regulation is necessary to ‘level up’ the whole sector in ‘powering down’ the flow of finance into fossil fuels and deforestation.
Throughout the year, the Climate Safe Lending Network contributed to cultivating a supportive environment for aligning macroprudential policies with climate-safe scenarios through dialogues with leaders of commercial and central banks on bringing about capital rules change and our publications on the role of regulation in accelerating the decarbonisation of the banking sector.
In early 2022 we hosted a roundtable for over a dozen key stakeholders across the banking and finance system to discuss how we might engage in the Basel Committee for Banking Supervision’s public consultation on the Effective Management and Supervision of Climate-Related Financial risks. A particular highlight of this discussion was mobilising around a consensus that capital rules applying to specific types of assets (based on Pillar 1 of the Basel framework) should be adjusted to reflect how high-emission exposures undermine global financial stability.
Afterwards, we solicited contributions from Climate Safe Lending Network participants, including bankers, investors, academics, and civil society leaders that were incorporated in a response letter we submitted to the Basel Committee in February 2022. Our key message is that it’s imperative that central bankers take a meaningfully precautionary approach and support banks trying to implement climate targets and robust transition plans by ‘levelling up’ capital rules. This response letter contributed to a public debate on managing climate-related risks to the global financial system in which it was featured in an article published by Manifest Climate that explored contrasting views on Pillar 1 and Pillar 2 as tools for addressing banks’ exposures to climate risks.
Engagement with senior leaders of the Basel Committee on capital rules change and the implications of changes in proposed guidance for central banks throughout the year culminated in the Climate Safe Lending Network hosting a closed roundtable session in September 2022 with 25 senior bankers, 15 senior regulators, policy makers and financial sector experts. Moderated by Stuart Mackintosh, Executive Director of the Group of Thirty, roundtable participants dissected capital rules that could be applied across entire sectors compared to those specifically singling out misaligned activities, such as the expansion of fossil fuels. The discussion was prefaced by an overview, provided by Professor Josh Ryan-Collins at the University College London, on the rationale for a more precautionary approach to financial regulation in respect of climate risks. Building on this overview, Julia Symon, Head of Research & Advocacy at Finance Watch, reviewed specific capital rule mechanisms, including one-for-one proposals. Also, Senator Rosa Galvéz, member of the Canadian Senate and sponsor of the Climate Aligned Finance Act, discussed the details of this proposed legislation.
Making a compelling case to the Basel Committee for adjusting capital rules to create a level playing field for banks to adopt climate-safe lending practices is one part of a broader effort that seeks to broaden regulators’ purview beyond financial stability to include a just, sustainable transition. To shine a light on the need for bolder regulatory action that takes into account financial and planetary stability, Climate Safe Lending Network Executive Director, James Vaccaro, authored “Blip, crisis, or collapse”. The central premise of this article, published by Green Central Banking, is that evidence of irreversible climate change provides the impetus for financial regulators to adopt a new approach to financial regulation focused on avoiding economic collapse.
Rounding out the year the Climate Safe Lending Network, in collaboration with Finance Watch, the Institute for Innovation and Public Purpose, University College London and the New Economics Foundation, made the case for climate calibrated capital requirements and a wider macroprudential framework in a research paper published by SSRN. A central theme of Fat Tails, Tipping Points and Asymetric Time Horizons, which is one of the top ten most downloaded papers on the SSRN site, is holding more capital, not less, as a pre-emptive action.
Beyond Senator Galvéz’s proposed bill in Canada, capital rules for climate continue to be debated in multiple jurisdictions in Europe. Both the EU (in its review of the Capital Requirements Regulation (2013/575/EU)) and the UK (through an amendment to the Financial Services and Markets Bill tabled by Caroline Lucas, MP) have introduced proposals for the one-for-one rule. We shall continue to follow these debates in 2023.
Following the Money, Leading the Change
During a series of conversations the Climate Safe Lending Network hosted on optimising positive shifts in the banking sector for clients and bank customer groups, participants developed a shared understanding of the bank and customer landscapes and identified key leverage points in the banking system where intervention by prosumer groups could make a big difference in decarbonizing bank lending and opportunities to advance their work more effectively. Among the ideas that were identified, addressing the climate impact of corporate cash emerged as having the strongest potential for accelerating the decarbonization of the banking sector.
In May 2022, we published a report, co-authored with The Outdoor Policy Outfit (TOPO), and BankFWD, which highlights the climate impact of cash and the potential power to transform financial supply chains. The Carbon Bankroll: The Climate Impact and Untapped Power of Corporate Cash quantifies the climate impact of corporate cash and reveals that for many of the world’s biggest companies, cash is their largest source of carbon emissions.
We’re thrilled to share that this report has garnered huge interest and strong media coverage since its publication, including in The Wall Street Journal, Fast Company, and The New Yorker. In addition, there’s been engagement on Twitter, with Bill McKibben’s long-form opinion piece generating significant conversation with comments from Naomi Klein and David Wallace-Wells. More recently, Fast Company published a follow-up article that takes a closer look at the methodology detailed in The Carbon Bankroll and how all companies can use it to better understand the climate impact of their cash and investments.
During the second half of 2022, we collaborated with TOPO and BankFWD on engaging corporate leaders, including major tech companies, in calculating the climate impact of their cash and investments and steps that can be taken to reduce greenhouse gas emissions through their financial supply chains. For example, in July, the report co-authors participated in a webinar hosted by Project Drawdown for corporate leaders involved in company finance to explore strategies for reducing the carbon footprint of companies' cash and investments. Also, at COP27 we co-hosted an event with BankFWD, TOPO, and Project Drawdown that described the findings of The Carbon Bankroll and how companies can draw upon the ideas presented in this report to help meet their climate goals.
In the coming months, we will continue to support the dissemination of the The Carbon Bankroll and engage with corporate leaders, alongside our partners, in following up on the findings presented in this report. Climate Safe Lending Network Executive Director, James Vaccaro, has been invited to present the findings and implications of The Carbon Bankroll report at the Association of Corporate Treasurer’s annual meeting in May 2023.
Creating a community of practice for changemakers
While many stakeholders are pushing for change from outside banks, it is ultimately up to banking professionals within these institutions to set climate targets and implement transition plans to achieve them. Over the past year we partnered with founding Climate Safe Lending Network member, Finance Innovation Lab, to grow a global network of banking professionals, who are actively working to align their bank’s strategy, operations, and culture with science-based climate goals through our Climate Safe Learning Lab.
In 2022, we successfully inaugurated the Climate Safe Lending Fellowship, a leadership program that supports banking professionals in building the knowledge, skills, and confidence to influence their banks in taking bolder climate action. Over a period of six months, 23 Fellows from around the world learned and applied tactics for aligning their bank’s lending with the Paris Climate Agreement and a just transition, such as integrating climate into all decision making, evolving the role of sustainability teams as climate strategy experts, and building the capability to act across the whole organization so that addressing climate change is everyone’s job. Throughout this programme we collected ‘stories of change’ to understand how Fellows are influencing their institutions in taking bolder climate action. These stories are documented in Catalysing Bank Action, which was published in June 2022, along with insights and lessons learned from the Fellowship.
In October 2022 we hosted a convening for Learning Lab members on Credibility in the Climate Transition. During this engaging session banking professionals explored the extent to which their bank is on track to meet Paris-aligned climate goals and their role in helping their institution get onto a credible trajectory. Participants came away from the convening with more clarity about what ‘good enough’ looks like, barriers and enablers to change, and next steps.
More recently, we hosted a gathering for Learning Lab members to share reflections on COP27 where banking professionals had the opportunity to take stock beyond the glossy brochures and ‘green-hushed’ press releases to check-in about how they are really feeling and doing and to explore what they need to do next. Climate Safe Lending Network Executive Director, James Vaccaro, was a guest speaker at this community debrief where he shared his experience at COP27 centering on what happened and what does it mean.
2023 Preview
In the year ahead we will continue to mobilise sustainable finance changemakers and leaders from across the public, private, and civic sectors to build upon the achievements made in 2022. At the dawn of a new year, we look forward to ushering in the next phase of cross-sector collaboration in which the emphasis of our work in 2023 will be on collectively moving ideas into action for bringing about a climate-safe world.
We’re excited to share with you a preview of our plans for 2023 in which special attention will be given to accelerating current initiatives for transforming the banking sector and incubating new ones. In the months ahead we will continue to provide a collaborative space for climate-safe champions to connect on and offline as well as to work together on collectively sourcing and taking to scale innovative, system-wide solutions for transforming the banking sector.
Climate Justice for Bankers
Distributive justice is a focal point of our work in 2023 that will be woven into our current initiatives that involve connecting and supporting banking professionals, engaging commercial and central banks in regulatory and policy intervention, and working with banks and their clients to decarbonize corporate financial supply chains.
Together we will explore pivotal questions, such as: Who gets what? How do we determine fair-share in an inequitable world? An important part of our work will be differentiating between equity (one’s rewards should be equal to one's contributions to a society), equality (everyone gets the same amount, regardless of their input), and need (people who need more will get more, while people who need less will get less).
Underpinning a just transition is the idea that restorative justice seeks to repair what is broken, compensate people who have been harmed, and reconcile relationships between individual people so that they can live together peacefully in the future. However, the foundations of capitalism do not currently provide sufficient protections of these concepts. As a result just transition is framed, consciously or unconsciously, as either being ‘just’ in the context of prevailing injustices or addressing some of the prevailing injustices through transition. Examples of how this plays out in the banking sector include:
Individuals on the frontlines of climate change who are experiencing reduced access to mortgages
Inequality within countries as well as between countries
Vulnerable communities who are exposed to high prices resulting from food and shortages
Small businesses and low-income families who are less able to invest in climate resilience, which leads to higher interest rates and higher costs for investment in infrastructure
Addressing the leadership challenges of financial regulators
We will continue to cultivate a supportive environment for the enactment of financial regulations and policies identified by sustainable finance leaders as impactful and feasible, such as regulated net-zero/Paris-aligned transition plans and capital adjustments for lending. Building upon the capital rules roundtable discussions that took place in 2022 with representatives of commercial and central banks, we will host events and produce reports to crowdsource innovative solutions that can be widely adopted.
We will also lay the groundwork for a Climate Safe Regulatory Lab that connects policy makers and regulators to discuss the inner challenges of making change within the complex environment of financial regulation. The basis for initiating the Regulatory Lab is a recognition of the enormous challenges being laid at the feet of the regulatory community as they navigate a path to long-term stability in the context of short-term crises and an unfolding planetary emergency. The Regulatory Lab will serve as a ‘safe space’ for innovation and leadership development, where financial regulators and policy makers within Treasury Departments and Finance Ministries can explore the ideas and implications of climate finance proposals. Modeled on the Climate Safe Learning Lab for banks, the Climate Safe Regulatory Lab will provide regulators with content, connections, and learning on change leadership essential for taking bolder climate action.
Growing a global community of climate champions within banks
In January 2023, we will launch the next Climate Safe Lending Fellowship cohort in collaboration with our partner, Finance Innovation Lab, which will focus on the theme of credibility in the climate transition. Banking professionals participating in this six-month leadership program will explore how they can enable their institutions to credibly demonstrate climate leadership through getting on a trajectory that will achieve Paris-aligned climate goals. Fellows will be supported in unlocking progress within their banks to align strong climate ambition with rigorous climate action.
We will also continue to build a robust, global network of banking professionals committed to addressing climate change who will share their learning and support one another to influence their banks in taking bolder climate action. Through the Climate Safe Learning Lab, partnership with the Finance Innovation Lab, we will carry out a variety of activities throughout 2023, such as virtual networking events, peer learning workshops, webinars, and individual coaching sessions.
We invite you to join us in accelerating the transition to a climate-safe world. If you would like to participate in any of the initiatives described above, please contact us at connect@climatesafelending.org.
Catalysing a Global ‘Race to the Top’ for Climate-Safe Banking
Banking interfaces directly with the real economy and has the potential to accelerate the changes we will need to make in the years ahead to get to a climate safe world. We have reached the point where the time for preparation – measurement, target-setting and transition planning – has to be translated into real action. That means practical interventions which will drive significantly better outcomes for everyone.
Putting relevant and innovative ideas into practice will lead to effective bank transition plans and provide businesses and individuals with what they need to address climate change and thrive in the future. Building on practical guidance the Climate Safe Lending Network has provided to bank transition teams through The Good Transition Plan and The Good Transition Plan Strategy Toolkit, we will host the Climate Safe Banking Catalyst Contest in 2023. The contest aims to set good ideas free by crowdsourcing from anyone (inside or outside of banking) from anywhere in the world practical and tangible ways of helping banks engage with their clients on implementing climate-safe transitions that:
Go Faster: Practical ideas for supporting accelerated transition within banking institutions and their existing clients
Go Further: Practical ideas for enabling finance for new and emerging climate solutions
Go Fairer: Practical ideas for approaches that ensure a socially just transition for all
Watch this space for more details about the contest and opportunities to participate. If your organisation is interested in becoming a contest sponsor, please contact us at connect@climatesafelending.org for more information.