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How Socially Responsible Banks Are Changing the World of Banking

Nicki is a journalist, author, and eco-warrior with something to say.

As society becomes more and more interested in conscious consumerism and corporate social responsibility, an increasing number of people switch towards more socially responsible enterprises. Banks included. But what exactly is a socially responsible bank?

What Are Socially Responsible Banks?

Socially responsible banks take measures to make sure that the money in the accounts of their clients is invested ethically. In a nutshell, socially responsible banks manage your money with a conscience, investing in social and environmental issues.

The transition to net-zero is heating up, with the International Energy Agency pushing to reach net-zero emissions by 2050. As it becomes increasingly more difficult to deny that the earth is facing a climate emergency, it’s clear that action is needed. Reaching net-zero and slowing the climate emergency calls for collective action, but big business will need to play a lead role. The banking sector included. Banks are amongst the most powerful institutions on the planet, and if real change is going to take effect, their cooperation is vital. But how?

Banks can drive change by becoming more socially responsible and conscious about the types of institutions they invest in, actively boycotting those who are causing damage to the environment. This shift has already begun, with frameworks such as the Principles For Banking helping to create the benchmarks for sustainable banking across the globe.

The Principles For Banking (PFB) is a framework to create a sustainable banking system, and aid the industry in showing how it positively contributes to society.

The Principles For Banking (PFB) is a framework to create a sustainable banking system, and aid the industry in showing how it positively contributes to society.

What Needs to Change in the Current Banking Model?

So what is the banking sector currently doing that is unsustainable? The answer to that question lies, in large part, with the assets that major banks are accumulating.

Major banks worldwide are too attached to fossil fuels, making it very costly for them if the value of fossil fuels were to drop. In fact, a whopping 95% of the total equity of the major European banks is from fossil fuels. Banks currently relying so heavily on the equity made from fossil fuels gives them a vested interest in keeping fossil fuels as the number one source of energy, despite the environmental impact.

While net-zero pledges and new sustainable banking models are on the rise – with more investment in sustainable and socially responsible initiatives – progress is slow and the banking sector, on the whole, remains unsustainable.

How Can Socially Responsible Banks Reduce the Banking Sector Carbon Footprint?

Combating climate change is a collective issue that requires all of us to do our part, no matter how big or small. How we choose to spend our money is part of this action. When we opt for sustainable brands, we are voting with our money. The same goes for the institution we choose to bank with. With the majority of the world’s banks choosing to finance environment-damaging fossil fuels, choosing a bank that doesn’t is one way that we can all do our part. Since the Paris Agreement was signed, sixty major banks have spent an estimated $3.8 trillion in financing fossil fuels. This staggering figure serves to further highlight how much of a carbon footprint our money has. But how is your money being used to fund fossil fuels?

Here’s a simplified explanation of how your money is used by banks. Every time that you deposit money into your savings account, you are loaning this money to your bank for a small fee, depending on your interest rate. Your bank will then invest this money in other sectors to profit from it. This is common practice amongst banks, but as the climate emergency intensifies, more and more of us want to know exactly what our money is being invested in.

Thanks to the wealth of information readily available online, it’s easier than ever to find out how your bank scores. Research shows that JPMorgan Chase and Citi are ranked the two worst banks for sustainability, both spending huge amounts of money to finance fossil fuel companies since 2016.

The 2021 "Banking on Climate Chaos" study shows the twelve worst banks for financing fossil fuels since the Paris Agreement.

The 2021 "Banking on Climate Chaos" study shows the twelve worst banks for financing fossil fuels since the Paris Agreement.

Switching to a more socially responsible bank may seem like a drop in the ocean when it comes to tackling the climate crisis, but small changes can lead to big results. As pressure mounts for world leaders to take a more hands-on approach, banks are also under immense pressure to drastically reduce fossil fuel financing and be much more transparent about the carbon footprint of the companies they fund. This pressure is paying off as a growing number of banks take the net-zero carbon emissions by the 2050 pledge. Six of the biggest players on the US banking scene have already committed to the pledge and Deutsche Bank has recently set itself a new climate target. After pressure from Greenpeace, Deutsche Bank announced its goal to dedicate 200 billion euros to financing sustainability projects.

The banking sector may be talking the talk now, but is it ready to walk the walk and become truly socially responsible?

Are Net-Zero Pledges More Than Just Empty Promises?

While the banking sector may be taking a step in the right direction with net-zero pledges, there is some debate over how big of a step it really is.

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Data from the Banking on Climate Chaos 2021 report shows that financing for fossil fuels has grown since 2016. While incredibly disappointing, this is no real surprise. As we saw earlier in this article, major banks simply can’t afford a sudden dip in the fossil fuel market. With 95% of their equity made up of fossil fuel assets, European banking giants like Deutsche Bank would take a huge hit.

With this in mind, it begs the question; Just how reliable are these net-zero pledges? The banking sector is in the spotlight now more than ever to step up and take real, actionable steps to combat climate change, but it also stands to lose a lot. Striking the right balance will be tough, but it’s essential. So what does net-zero mean and how can it be achieved?

What Exactly Does Net-Zero Mean?

The Paris Climate Agreement, adopted in 2015, set a goal to limit the number of carbon emissions produced globally by 2050. If a country produces emissions, it needs to offset these emissions, absorbing them into the atmosphere to maintain a net-zero level.

The agreement aims to substantially reduce global greenhouse gas emissions in an effort to limit the global temperature increase in this century to 2 degrees Celsius above pre-industrial levels, while pursuing the means to limit the increase to 1.5 degrees. The agreement includes commitments from all major emitting countries to cut their climate pollution and to strengthen those commitments over time.

Source: https://www.nrdc.org/stories/paris-climate-agreement-everything-you-need-know

The issue with the net-zero pledge is that several sectors simply don’t have low-carbon alternatives. Industries that rely heavily on fossil fuels will then need to figure out ways to offset these emissions, such as buying carbon credit. Another issue with the pledge is that it’s incredibly difficult to prove how effective initiatives to offset carbon emissions are. Industries that can’t move away from fossil fuel use and need to rely on carbon offsetting will have a tough time offsetting on the scale needed to reach the net-zero pledge.

These roadblocks have served to slow down progress on the net-zero pledge in the banking sector with many banking institutions not making it past planting a few trees and going paper-free. More alternatives for offsetting carbon emissions will be needed for the zero-net pledge to come to fruition by 2050.

Is This the End for Unsustainable Banks?

So does the net-zero pledge spell the end for unsustainable banks? Probably not. There is no denying that the banking sector needs to follow suit and move away from fossil fuels, but this process is set to be slow. A global transition from fossil fuels to more sustainable energy sources will take time and fossil fuel assets like coal will likely decrease in value over time, rather than disappear.

As this happens, a new framework for banking will need to break through and become the norm. Steps are already in motion to create the sustainable banking of the future, but again, this will take well over a decade to achieve. Despite being a slow process, it’s now a case of when rather than if. The call for fast action is getting louder, and as more and more people show their stance on climate change through who they choose to give their business to, the next decade is set to be a tumultuous one for the banking sector.

Europe may be the leader in globally socially responsible investment assets, but there is still a long way to go. European banks still rely too heavily on the equity of fossil fuel financing.

Europe may be the leader in globally socially responsible investment assets, but there is still a long way to go. European banks still rely too heavily on the equity of fossil fuel financing.

So how can we all do our part in this transition towards a more globally sustainable banking sector?

Steps to Make Sure You’re Banking Sustainably

Socially responsible banks will use your money to finance ethical and sustainable projects such as solar farms or small business loans, as opposed to fossil fuels. They recognise that their business choices impact the planet heavily and they take steps to reduce funding for projects that are bad for the environment.

If you want to go green and switch to a more socially responsible bank, here are some simple steps you can take.

1. See how socially responsible your current bank is.

The Rainforest Action Network recently compiled a list of the banks that are the biggest financiers of fossil fuels. The first step in your move to greener banking is to check if your current bank is on that list. If it is, consider switching to a more sustainable bank or credit union. If you can’t move all of your money across in one go, start small. Next time you need a new financial service such as a business or personal loan, look out for a more sustainable bank –perhaps even a 100% online bank– and make sure that your money is being used in a climate-conscious way.

2. Keep an eye on your deposits.

Be active in checking up on your bank to see how they are investing your money. The more aware you are of what your money is being used for, the better. By becoming a watchdog and holding your bank accountable, you can actively contribute to creating a greener banking sector.

3. Don’t be fooled by greenwashing.

Remember that even if your bank has a long list of green initiatives on its website, this often doesn’t include funding decisions. If you’re unsure of what greenwashing looks like, an example is a bank citing lots of eco-friendly efforts on its website – such as going paper-free – while also financing arctic drilling.

4. Go 100% online.

Fully online banks could just be the future of banking. By removing the necessity for physical branches, banks can significantly reduce their carbon footprint. 100% online banks use less electricity, less paper, and since clients don’t need to travel to a physical address, fewer carbon emissions.

Key Takeaways

We have a long way to go if we are going to meet the Paris Agreement climate goal, but there is hope. As the world moves away from fossil fuels, the banking sector will too, putting more financing into sustainable projects. We can all become advocates for a greener tomorrow today, starting with who we choose to give our business to. Small steps can lead to big changes and switching to a greener, more socially responsible bank is a great first step in tackling the climate issue.

© 2021 Nicki Wylie

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