Companies are under scrutiny for how major banks that they partner with are financing carbon-intensive projects. How can companies wishing to be “green” respond? One solution is to switch to a low-carbon bank if possible. But a better hope is that scrutiny on how even traditional financing is part of a global economic system heading toward catastrophe will convince business leaders to take drastic, holistic action to fight climate change. This perspective could create a world where CEOs show up for climate on Capitol Hill and in the editorial pages of newspapers, where corporate dollars fund climate advocacy and not the oppositional Chamber of Commerce, and where managers buy employees bus tickets to climate marches. Daylighting big finance’s role in the climate crisis can be incredibly valuable. But only if business leaders learn the right lessons from it.
When it comes to efforts to tackle climate change, there’s not a lot of love flowing to bankers these days. In March, the Securities and Exchange Commission proposed a new rule requiring banks to disclose the carbon footprint of their loans — so called “financed emissions.” A bank that loans money to a coal mine developer, for example, would be required to report on the resulting emissions. Environmental groups such as Rainforest Action Network and 350.org have expanded campaigns targeting Chase, Citi, Wells Fargo, and Bank of America, among others, for financing tar sands and other fossil fuels. And in May, a report called “The Carbon Bankroll” showed that climate-concerned businesses like Google, Meta, Microsoft, and Salesforce are effectively misstating their carbon footprints, failing to account for cash holdings that banks repurpose, at least in part, to fund fossil fuel development.
Climate advocates have a point: It’s hard to call yourself a green company if your cash assets are underwriting global warming.
So what’s a responsible business to do?
One conventional approach would be for corporate leaders to double down on cleaning up their own house. They could purchase more offsets, ramp up energy efficiency and renewables to cut emissions, and even switch to, say, Amalgamated, a leading, if relatively small, low-carbon bank. That act would further decarbonize operations and, coupled with campaign pressure and media daylight, it might also force banks to create meaningful policies banning new coal extraction, halting new gas exploration, and eliminating other high carbon investment like tar sands development.
The problem with these tactics is that they lack the power to drive enough global emissions cuts to stabilize the planet’s temperature below two degrees Celsius in the time we have left. There are other problems: offsets are often bogus; efficiency can only go so far; and capital will still flow to fossil fuel extraction from other sources, uncooperative banks, or as a result of a lengthy wind-down. Meanwhile, there just aren’t that many low or no-carbon banks to switch to; they tend to be small; and as a result, few have the expertise and staff required for complex international deals. It’s not that this path isn’t valuable in some way, but it’s business as usual, and it’s just not enough.
A more promising approach could result from a thorough understanding of the whole climate-banking landscape, including the SEC rule, climate campaign demands, and the Carbon Bankroll report. Internalizing the fact that finance as currently practiced ensures climate chaos might lead businesses to the conclusion that they can’t escape climate change unless they fix the whole enchilada. The only way out is to create an economy that operates on clean energy, with legal guardrails in place to restrain the worst aspects of capitalism, such as unpriced externalities.
This new understanding — that a problem like climate doesn’t get solved by cleaning up the home office — could help corporate leadership throw in the towel on a 30-year failed strategy of addressing climate by tackling organizational impacts like carbon footprint or waste, and instead steer them towards power-wielding and movement building.
What might that higher-leverage, bigger picture business strategy look like as applied to banking?
Ivan Frishberg, who is Senior Vice President and Chief Sustainability Officer at Amalgamated Bank, described some practical steps businesses can take that support a reform movement.
The first would simply to be to change corporate carbon measurement to account for “financed emissions.” This would lead to further public and media awareness of the problem, but also to conversations between banks and businesses. To its credit, Salesforce has been wide open to the dialog, even providing a blurb on the Carbon Bankroll report. This is the sort of engagement that could lead to meaningful next steps.
One such step, suggested by a former Sustainability Director at a major American bank who asked to remain anonymous: “A company with the influence of Google could likely set rules for the use of their cash deposits — if you want our deposits, you can’t use them for X, Y or Z.” It would also start to steer financial institutions towards a “good bank, bad bank” strategy, which would split riskier, less desirable carbon-based assets from cleaner ones. An example of this model is Citi Holdings, created after the financial crisis to bundle and eventually sell distressed assets. Under such a model, market forces might then take hold. “Good bank” operations would likely attract and retain talent disproportionately, and could even price products differently — since there would be less risk in the good bank vs. the bad.
It’s not a radical idea. Ford has already created two different units, splitting its electric vehicle business from its internal combustion production, though both will remain under the Ford umbrella.
Frishberg noted that businesses could also partially leave a bank — moving cash to a low carbon financier while continuing to work with larger banks on projects that require international dealmaking and finance expertise not available elsewhere. This would also generate media attention while allowing for continued engagement, which a complete divestment would not.
In the end, these are incremental steps. It will be hard to solve climate change and discourage new investment in fossil fuels if the cost of emitting carbon dioxide remains mostly free, and without more aggressive regulation. To get there, we’ll need government to step up. If that’s to happen, business leaders will need wield power at the highest levels. Beyond modifying carbon footprint reporting or slowly pressuring partner banks, CEOs would need to show up as climate advocates on Capitol Hill and in the editorial pages of newspapers. Corporate dollars would need to fund climate advocacy and not the oppositional Chamber of Commerce.
Daylighting big finance’s role in the climate crisis can be incredibly valuable. But only if business leaders learn the right lessons from it, and take action appropriate to the scale of the problem.
Credit byHarvard Business Review