Six ways to fix sustainable finance – 6: Incentivize green finance

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By:
Helen Avery
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Euromoney has spoken to 20 sustainable finance experts about what is needed to bring about real progress. The last of our six recommendations is for efforts to be made to incentivize green finance.

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SIX WAYS TO FIX SUSTAINABLE FINANCE
Introduction: Sustainable finance's biggest problems
1. Join the PRB
2. Mandate TCFD
3. Standardize climate risk measurements
4. Develop transition finance
5. Target deforestation reduction
6. Incentivize green finance

Convincing dealmakers at banks to start viewing their work through a sustainable lens is an uphill battle, say those in sustainable finance roles.

“It’s a constant internal fight at the bank to have climate take priority – and we are one of the leaders and have support from the top,” says one. “It doesn’t help when you have laggards in the industry as this really needs to be a collective effort and competition always helps.

"Would a regulatory push help? Yes. But collectively we have an influence on regulators – we shouldn’t forget that.”

Incentives would be welcomed say sustainable finance heads. “A regulatory nudge would be helpful – such as partial incentives towards financing green or hits against financing brown,” explains one.

“We’d see the capital flow in the right direction pretty fast if that happened. If you are a bank and your job is to lend capital and it costs more for you to lend to one industry than another, then you’re going to see a much more rapid change.”

At present, however, they agree that the data isn’t sufficient for the majority of central banks and regulators to make such bold moves. However, it hasn’t stopped Natixis from developing its own internal green weighting factor. Several European bankers interviewed said it could provide a template for other banks.

Natixis’ green-weighting factor introduces a green/brown adjustment coefficient to Natixis CIB’s analytical risk-weighted assets (RWA) on every deal the bank makes (other than to the financial sector).

"A regulatory nudge would be helpful – such as partial incentives towards financing green or hits against financing brown"
- Head of sustainable finance

It is based on how the client or the project funded ranks on a seven-colour scale from dark green to dark brown, which Natixis has spent 18 months developing and implementing. While it’s an internal analytical tool at present, it creates an “additional decision thermometer” for the bank’s decision makers.

“While it does not impact the regulatory RWA, i.e. the overall capital needed to be put aside by the bank, it is aimed at influencing our internal capital allocation and constitutes a key tool to monitor our climate and environmental transition, as well as supporting that of our clients,” says Orith Azoulay, global head of green and sustainable finance at Natixis’ CIB, who co-leads the development of the green weighting factor. “Bankers are now incentivized to progressively ‘greenify’ their portfolio of financings.”

The metrics are climate-focused but include other environmental externalities such as waste, water, biodiversity and pollution.

Chris Hart, a senior sustainable finance associate working on natural capital at not-for-profit, Global Canopy, suggests building incentives into remuneration.

“Bank senior level executives or client relationship managers could have part of their bonuses and remuneration based on sustainability metrics," he says. "Once you put it into financial terms for bankers, then the nature of the discussion would change.”

Some banks, including one in Malaysia, have already implemented similar policies where a proportion of remuneration of top executives is linked to sustainability metrics.

There are other actionable points on the wish list of sustainable finance heads such as greater support from the top, stronger commitment from the US banks and a discussion around financing nuclear as a solution to fossil fuels until other technologies emerge.