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10/30/2018

How can banks support the Paris Climate Deal?

The Paris Climate Deal has once again triggered the debate about sustainability. Banks have an important role in society to contribute to a more sustainable world and help to achieve the goals set by the Paris Climate Deal. In this article, an overview will be given of the different initiatives banks in The Netherlands have taken to reach these goals. Furthermore, this article will investigate the initiatives the banking sector could take to further contribute to the Paris Climate Deal.

Responses to the Paris Climate Deal

The goal of the Paris Climate Deal is to limit global warming of the earth by less than two degrees Celsius. As a reaction on the Paris Climate Deal concerned sectors in The Netherlands work together under the Dutch Climate Agreement. They take collective measures to ensure that the Netherlands will reach the reduction targets set in Paris. Recently, the sectors proposed their high-level contribution to this goal in the Dutch Climate Agreement. The contribution of the sectors touches seven areas, such as making houses and buildings more sustainable and greener as well as the financing for the energy transition. During the negotiations, the financial sector participates as a task force. They advise the different sectors on the eligibility of the projects and they make concrete plans and recommendations to facilitate or accelerate the green transition [1].

In addition to banks’ participation in the climate agreement, Dutch banks are active in the platform for sustainable financing led by the Dutch Central Bank. Members of this platform are the Dutch financial associations, federations, the Ministry of Finance, the Ministry of Infrastructure and Environment, the Netherlands Authority for the Financial Markets and the Sustainable Finance Lab. These members discuss the various sustainability initiatives within the Dutch financial sector [2]. For example, banks, insurers, fund owners and pension providers developed the Platform Carbon Accounting Financial (PCAF) method. The PCAF method measures the CO2-impact of their investments and financing [3].

Current Initiatives of Dutch Banks

Initiatives of banks in the field of sustainability are quite important. From their central role within the community banks could have a significant influence on the goals of the climate deal. Banks in the Netherlands offer various products in which they contribute their financing policies to assist the transition towards a more sustainable world. These products are green loans for consumers and businesses as well as green saving and investing funds.   

Green Loans
Banks offer green loans to consumers. For instance, consumers could apply for a higher mortgage on their house by increasing their mortgage until a maximum of 106% of the house value. Consumers who apply for a higher mortgage to make their house more sustainable (energy label/EPC of the house meet certain criteria) can receive a discount on the interest rate. Banks offer the option of an energy saving budget, which enables consumers to decide in a later stage which energy saving measures they will implement. Banks can give consumers advice on the various possibilities to make their house more sustainable [4]. In addition, various banks in The Netherlands have started a partnership with energy suppliers to lower the threshold for households and employees to make the green transition towards more sustainable houses.

Not only can consumers apply for a green loan, businesses can also qualify for a green loan for their sustainable or innovative projects. In order to be eligible for a green loan, a company is required to obtain a green statement from the government. To make the application of a green statement straightforward for companies the government has created various categories to which sustainable projects could belong. In addition, each category has its instructions for the design of the project plan [5].

Green Saving and Investing
Furthermore, banks offer green savings and payment accounts or deposits. With a green savings account consumers can put their savings at a bank that is recognized by the government as a green institution. The bank will invest the savings in sustainable initiatives, e.g., initiatives with a focus on the environment. Furthermore, consumers can choose to invest in various green funds. The interests you receive on your savings might be lower than at other institutions with no green savings accounts [5]. 

In The Netherlands green savers and investors can receive tax advantages if they store their money in green funds. These green funds have to be approved by the government, which could lead to a shortage of green investment funds for banks to offer to their clients. Therefore, the green investing funds are not always open to new investors. Besides the fiscal driven investments, consumers have other opportunities to invest in projects that contribute to the climate deal. Consumers can decide to invest in crowdfunding as well as invest in sustainable funds at banks. The difference between green investing and sustainable investing is that in the latter case the funds are not approved by the government. These funds consist of shares in stock market listed companies and government bonds. The bank can choose which shares and bonds to include based in their criteria [5].

Other Initiatives
At this point, the financial sector is collecting data from companies about the financial impact of climate change on the businesses of these companies. This data will help the financial sector to integrate climate risks in their investment decisions. Companies can report the financial impact of climate change on their businesses according to the norms of the Task Force on Climate-related Financial Disclosures [1]. Furthermore, banks could use their position as a lender to steer businesses’ strategy towards a more sustainable one. 

For example, the production decision of businesses is closely related to CO2 - emission. Banks have prior knowledge about the business plans of the companies they finance and could thus guide companies to become more sustainable. Also, banks are familiar with the market these businesses operate in and they know how emission could be reduced. In comparison, consumers and governments cannot intervene in the business process until the process has already occurred. There is some discussion that boycotting CO2-intensive companies might have a contrary effect. The boycotted companies will look for non-sustainable financiers to continue their business process. Instead of assisting these companies towards a greener business strategy they might become even more environmentally damaging [6].

Importance of Environmental Banking

As aforementioned, there is still a mismatch between sustainable investment projects and investors. On the one hand, investors and investments sometimes have difficulties to find each other. The Dutch expertise center for Financing Sustainable Energy projects has created a platform which makes it easier for investors and investments projects to find each other. The expertise center combines technical and financial information and shares this information with initiators of energy projects and potential financiers [7]. This idea of a platform that assists the transaction between investors and sustainable investments might also be interesting for other countries. Also, it is important that this platform receives sufficiently publicity to ensure that investors and projects know where they could meet.

On the other hand, the green funds are not always open to new investors, since a shortage of approved funds could arise. By acknowledging more funds as green investment funds, the government can increase green investments significantly due to the accompanying tax benefits. Under investors, the demand for sustainable products is quite large and has, in the Netherlands, been increasing over the past 30 years. Furthermore, if the information is released about the sustainability of investment funds, sustainable investment funds experience an increase in investment flows [6].

Finally, retail customers do not show sufficient interest in sustainable financial products, while their general demand for sustainable products increases [6]. This could be explained by the fact that the sustainable profit generated by sustainable saving and investing is not transparent. Therefore, it might not be clear for consumers how their sustainable savings account contributes to a better environment. Increasing the transparency of the generated sustainable profit will increase the involvement and use of consumers in sustainable financial products.

For several years banks are considering and publishing their social responsibility and the impact of their activities on their stakeholders. However, these reports are not transparent for consumers as there are multiple different worldviews of corporate sustainability. Choosing a common view to define corporate social responsibility will make it easier for consumers to compare the sustainable profits of banks and increase the involvement of consumers in sustainable financial products. Furthermore, better stakeholder engagement processes within banks will increase the transparency of sustainable profit as well.   

Conclusion

The Paris Climate Deal has triggered the debate about sustainability. The financial sector has taken on an important role to reach the goals set by the Paris Climate Deal. For example, as a reaction on this deal concerned sectors in The Netherlands work together under the Dutch Climate Agreement. The financial sector acts as an advisor for the eligibility of the projects and they make concrete plans for the green transition. Furthermore, the banks in The Netherlands are active on the platform for sustainable financing, in which they developed the PCAF method to measure the CO2-impact of their investments and financing. In addition, banks offer various green and sustainable products for consumers, such as green loans, green saving and investing products and they collect data from companies about the financial impact of climate change on the businesses of these companies.

The measures taken by banks to reach the goals of the Paris Climate deal are important since many investment projects could contribute to a more sustainable world and they need financing. Besides, the demand of investors for sustainable investment funds is significantly large. Nevertheless, retail consumers do not show sufficient interest in sustainable financial products. This could be overcome by increasing the transparency of the generated sustainable profit by the financial sector.

Sources

1. Klimaatakkoord.nl

2. https://www.dnb.nl/over-dnb/samenwerking/platform-voor-duurzame-financie...

3. http://carbonaccountingfinancials.com/

4. https://www.geld.nl/hypotheek/vergelijken/meer-hypotheek-energiezuinig-huis

5. https://www.rvo.nl/subsidies-regelingen/regeling-groenprojecten

6. ESB Dossier: De Toekomst van Banken: een blik op technologie, klant en maatschappij.

7. https://www.nvb.nl/thema-s/ondernemen-financieren/1998/expertisecentrum-...

 

 

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