Sector showcase: Addressing Climate in the Banking Industry

• Increased expectations from regulators, investors and clients
• Rapid change to green bonds and sustainability loans within 18 months
• No time for directors to drag the chain

Banking may not be the first industry you think of when contemplating climate change but it has become the heart and centre of a rapid and radical transformation in its focus on sustainability.

The impact is causing substantial adjustments to the global economy and banks know this will impact their balance sheet and operations. Global regulators are becoming more active, and investors, clients, and the public are all looking for actions, mitigation, adaptation, and transparency on what companies are doing.

Historically, banks have approached climate change through the lens of Corporate Social Responsibility (CSR). But now with increasingly high financial stakes, growing external pressures and new regulations, climate change has become both an opportunity and a financial risk.

Westpac New Zealand was the first bank to both be certified Carbon Zero by Toitu Envirocare in 2019 and publish a Climate Risk Report in 2020.  Westpac Director Jonathan Mason says they moved first to demonstrate leadership but there was also a marketing imperative to attract young people who are most concerned about climate change.

“Young people are valuable customers for a bank because once they start banking with you, they could be customers for 60 years through home loans, term deposits, credit cards and cheque accounts.”

Westpac wants to be seen to improve lives and be part of leaving a better world and without real climate change action Mason worries what people will say of this time in generations to come.

“I fear in two hundred years they’ll talk about our in-action; that we just took the profits from burning fossil fuels even though we knew what it was doing to the globe.”

But Westpac is also aware that there are risks in taking a strong stance on sustainability, especially in New Zealand with a large agricultural economy. 

‘Agriculture is challenging as even though there is research underway into how to reduce methane emissions, it’s not yet clear how that’s going to be reduced.  In the meantime, we can continue to work with partners to look for ways they can have an impact such as riparian plantings, nutrient analysis and water quality improvements.”

ASB is also engaging with its customers on sustainability – and farming is one of its key focus areas, says ASB’s General Counsel and EGM Business Services, Stephen Bendall.

“There are huge challenges ahead for New Zealand companies in moving to sustainable, low-emission business models. ASB’s ethos is that we have a responsibility to be right there alongside our clients and customers assisting them to not only manage risk, but also embrace opportunities.”

“ASB’s Chair, Dame Therese Walsh, also leads Chapter Zero here in Aotearoa New Zealand so we have a focus on this from the highest level of our business.”

Bridget Coates, Chair Toitū Tahua, Centre for Sustainable Finance, says the BNZ’s sustainability linked loans for Kiwi farmers and growers, based on compliance with the Sustainable Agriculture Financing initiative guidelines, is another breakthrough in a long list of sustainability products developed by banks.

“Farmers now have an incentive to support sustainability initiatives, in return for lower interest rates if they commit to meeting sustainability targets with respect to emissions reduction, water, waste, pollution, ecosystem management and improvements in long-term resilience.”

Coates has seen rapid change from banks and says this has come through multiple dimensions.

“Banks have to adhere to global regulatory change, but their customers are also demanding change.

“Most of our capital comes from offshore and many global providers have declared themselves to be net zero and are increasingly insistent on lending for sustainable projects. 

“While there is a long way to go, bonds are greening rapidly and sustainability linked loans have grown from zero in just eighteen months.

“Loans are typically long term. Banks have to think about what will be acceptable in the future through a regulatory and consumer lens.”

Bendall says new disclosure regulation – which will require banks to report on their climate risks and strategies within annual financial statements – will have a profound impact.   

“Banks already report on their own greenhouse gas emissions. Soon we will also need to report our customers’ collective emissions, as well as how we plan to transition lending portfolios to net zero. It’s a challenge but also hugely exciting because it places climate solutions at the heart of banking.”

The New Zealand Bankers Association is working with its members and government to ensure the data collected is consistent across the industry.

CEO Roger Beaumont says with the complexity of climate change they need to develop a single source of truth that is consistent across the industry.

“We’re working on developing a range of scenarios. We’re saying let’s get practical and real here and determine what changing global temperatures might mean for New Zealand. 

Both Coates and Mason are urging directors to upskill rapidly and read widely while, Mason says, also embracing uncertainty.

“Directors are in a unique position because they are exposed to multiple industries and can make a broad contribution on the wider view,” says Mason.

He says initially directors can approach sustainability as a ‘dead weight cost’, but while there may be short-term costs, longer term it can enhance shareholder value.  

Coates and Mason have likened directors’ attitudes to climate change issues to the transformation following new health and safety legislation that impacted boards. 

Mason believes regulatory change is likely to make it a substantive part of director duties.

“Not having climate change on a board agenda and understanding the potential business risks is likely to soon subject directors to liability risk comparable to the 2015 Health and Safety Act.

“Initially, health and safety wasn’t taken particularly seriously,” says Coates.  “Then directors became personally liable, now it’s second nature and on every board agenda.”

Coates says this is similar except it is a challenge across every area of business and happening a lot quicker.

“Directors do not have the option of dragging the chain.”