Exploring “green” finance offerings, part 4

In this blog series, we highlight emerging green products and services and why banks should pay attention to them. In part 1, we looked at green finance and green bonds, while in part 2, we examined sustainability-linked loans (SLL) and sustainable supply chain financing (SSCF). In part 3, we explored what happens when you blend green finance with emerging technologies.

In this final blog, we review the future of sustainable finance and how banks can make the shift toward greater sustainability.

The pressure for banks to “go green”

Banks face increasing pressure from customers, shareholders, employees and regulators to be more sustainable in their operations and service delivery. Their ability to provide capital puts them in a unique position to impact market direction. For many banks, the move toward sustainability is a new activity where there is much to be learned.

Opportunities outlined in earlier blogs in this series provide an effective playbook for banks to consider on their path toward a more sustainable future. In this blog, we continue this exploration by discussing additional actions banks should take as they progress on their sustainability journey.

Environmental, social and governance (ESG)-related strategies and risks have made a rapid and significant shift from “emerging” to foundational factors that banks and corporations must integrate into their core business strategies and risk-related activities.

Further, green finance continues to gain traction as pressure rapidly mounts from governmental and industry regulators, investors, and customers for banks to prioritize ESG criteria and to put sustainable financial principles into practice.

These stakeholders also want banks to operationalize and extend a more sustainable business model and offer a variety of other benefits, such as incentivizing—not just encouraging—customers to become better climate citizens by, for example, rewarding them with more favorable financing terms and/or greater access to capital for green activities.

In fact, banks are being asked (or, more frequently, expected) to perform an increasing number of roles within our larger society, some of which are slightly outside the norm for a typical banker.

Making your supply chain more sustainable

The first mandate is to speed up the sluggish supply chain and make it not only more sustainable, but also more traceable and transparent. Banks are under pressure to evaluate their supply chain financing and letter of credit requirements and processes and accelerate digitization, eliminating paper-bound processes as fast as they can through the latest technology. At the same time, they need to be able to trace and account for the impact that these supply chains have on the environment.

Making capital decisions based on sustainability

The second mandate is tied to the banker’s unique position and decision-making power in terms of access to capital. Banks can decide to offer or restrict capital to their customers, who are often a vast array of buyers or sellers across multiple industries, based on their sustainability risk scores. For example, they can attach specialized terms and conditions to their financing instruments based on these risk ratings and even demand periodic reviews of relevant data from their customers to keep the pricing, or even the financing, in place.

In other words, bankers sit between requests for financing and the receipt of financing. As a result, they are in a prime position to become “guardians of the planet” as de facto enforcers of ESG-related regulations.

Providing sustainability-based incentives

The third mandate involves making buyers and sellers aware of new carbon credit offers and other ESG-related governmental or jurisdictional incentives that can help lower their overall cost of becoming more sustainable. This opportunity is identical to the approach many banks use in helping their customers take advantage of tax law changes and government programs, and is a way for them to offer a value-add service to customers.

Multiple individual banks have publicly announced commitments to ESG strategies that range from how they will interact with their customers to how they will operate their businesses. A few examples include:

• Forming industry coalitions to work on ESG issues
• Pledging to reduce reliance on fossil fuels and related products
• Pledging to reduce carbon emissions
• Expanding product offerings that meet ESG expectations/standards
• Promoting ESG disclosures aligned with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Disclosures (TCFD)

Next steps

Green finance continues to gain traction. If you’re a bank or financial institution, consider these next steps in preparing for the future of green finance:

• Think about how your products and services can reach suppliers with traditionally limited access to finance, such as small-to-medium-size businesses (SMEs) or suppliers in emerging markets where sustainable options may be more limited.
• Participate in innovative trade digitization pilot solutions that support traceability of sustainable goods and transparency of sustainability data.
• Consider the mandates described above.

If you’d like to explore this topic further, reach out to Andy Schmidt.