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Opinion

Smaller banks have a key role to play in the climate fight

Many are still a long way from understanding the risk climate change poses to their businesses.

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Photo: iStock

It is easy for those who work on sustainability to forget how widespread ignorance, indifference and even antipathy to the topic remains among those who don’t.

Even at the most environmentally minded banks, sustainability specialists bemoan the lack of knowledge and awareness among their more commercially minded colleagues; one notes that a team member still confuses biodiversity and biosecurity.

The bigger banks are trying to address this. Achieving net zero by 2050, as many of them have committed to doing, has increased the incentives for ensuring that all staff understand the importance of aligning with the Paris climate goals and that all businesses are working towards it.

State ownership is widespread … while even privately owned lenders are often controlled by local elites

Clearly, this is all to the good. The biggest global and European banks finance, or arrange financing for, a substantial chunk of the highest-polluting industries, from energy and mining to construction and defence.

At the same time, much of the financing for other environmentally problematic sectors, such as transportation, agriculture and manufacturing, is provided by smaller local and regional banks – many of which are more willing and able to lend than ever after the liquidity inflows of the Covid era.

While some of these are doing valuable work in areas such as green trade finance and energy-efficiency lending, often in conjunction with international financial institutions (IFIs), most are still a long way from assessing the risk climate change poses to their businesses, let alone vice versa.

A survey by the European Bank for Reconstruction and Development (EBRD) of partner banks in its countries of operation, conducted in the first quarter of this year, found that only 43% of respondents were considering the impact on their portfolios of climate change.

Complex and expensive

Part of the problem is that understanding and mitigating climate risk is a complex and expensive business, requiring much investment in data, training and advisory services. Here, development banks such as the EBRD can provide crucial help with capacity-building and guidance on best practice.

Even then, there will be hurdles at national and local level. Global banks today face intense scrutiny on their climate impact from a plethora of increasingly environmentally conscious stakeholders, from investors and regulators to borrowers and NGOs.

Local lenders still largely escape this oversight. Indeed, the pressures on them often work in the other direction. State ownership is widespread in many banking sectors, while even privately owned lenders are often controlled by local elites.

This means that, in jurisdictions where livelihoods depend on polluting sectors, or where the cost of energy transition is more than policymakers are prepared to pay, banks are likely to fall into line behind local political leaders.

If climate goals are to be achieved, however, these banks will have to be part of the solution. Given the limitations on these lenders, they are unlikely to get there on their own, or with the help of IFIs. It will require full commitment from policymakers of all stripes, from regulators to politicians.

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