Sustainability Finance

We are well beyond a growing awareness of the various environmental risks brought about by deforestation, water rights, water shortages, climate change, greenhouse gases, etc. Banks have historically financed everything from nuclear deals, to palm oil plants, coal mines to golf courses.

Marcel Jeucken, ex RaboBanker, wrote the book Sustainability in Finance explains,

“What does a bank have to do with sustainable development? In an economic system, a bank fulfils an important role: it is an intermediary between borrowers and lenders of money. Banks are the most important intermediaries in an economy. This intermediary function centres on bringing together and coordinating savings and investments. As a financial intermediary between entities on the market, a bank has four functions: transforming money by size, duration, place and/or time, and risk. It is particularly this last function (the distribution and management of risks) that will probably be the most important one for attaining a sustainable society. Between borrowers and lenders of money what develops is information asymmetry, including that which concerns environmental aspects.”

So how should banks address the current needs of our population with the environmental hazards caused by financing certain “bad” things? Take coal for example. BP released their 65th Statistical Review of World Energy report for 2016 and finds oil, at 32.9%, increased its share of energy consumption in 2015 for the first time since 1999, while coal’s share fell again but remained in second place. Renewables accounted for 2.8% of global electricity generation, up from 0.8% 10 years ago. Almost all energy consumption growth is in developing nations.

We know the coal industry is a huge source of carbon emissions.

The organization Coalbanks.org thinks we should stop financing coal companies all together and calls upon all banks to publicly pledge to phase out finance for the coal industry.

coal1

But what happens to our electricity needs as outlined above?

Water is another example. Companies now do a better job of mapping business processes back to raw materials, but what about water consumption. From droughts in California and Ohio to continuing water shortages in India and Brazil's Sao Paolo, the impact of water scarcity on populations, economies and companies has been felt worldwide. Global water stress is fast becoming a major economic, political and social issue, and a supply chain risk to which companies are responding with a range of initiatives and innovations. Supply chains that consume and do not resuse water, should they be taboo?

Another good example and one I wrote about previously is palm oil – see Palm Oil and Sustainable Trade Finance

Today there are countless examples of sustainability issues and banking and the big intersection is credit.  There are considerable environmental risks involved in the financing of many bank clients today. The Bank SEB even has a web site devoted to these issues.

To stay abreast of these issues, I would recommend checking out sites such as:

Sustainability in finance

Environmental Finance

As Marcel says, an environmental risk associated with a client can become a financial risk for the bank. For example, he says collateral can decline in value or even take on a negative value more and this has been shown to happen in the event of serious soil pollution.

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