Unit 6: Responsible Retail, Commercial and Corporate Banking PDF

233 |Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking INTRODUCTION LEARNING OBJECTIVES Banks are well positioned to respond to (and shape) On completion of this chapter...

233 |Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking INTRODUCTION LEARNING OBJECTIVES Banks are well positioned to respond to (and shape) On completion of this chapter you will be able to: consumer preferences, reallocate credit, and mobilise capital towards environmentally and socially sustainable describe how banking can impact the environment economic activities. They play a key role in a successful and society – both positively and negatively – and how societal transition to net zero. There are four main it plays a key role in a successful transition to net zero; types of banks, each of which plays a different role in describe the UN Principles for Responsible Banking the economy and offers different types of products and the Net Zero Banking Alliance, and how these and services: retail banks serving individuals and small support the alignment of banking with the objectives businesses, corporate and investment banks serving of the Paris Agreement and the UN Sustainable larger clients, central banks, and national and multilateral Development Goals; development banks. describe how banking products and services can This chapter focuses on retail, corporate and investment align finance with the Paris Agreement and other banks, and describes how banking can be aligned with sustainability objectives, and support customers and the objectives of the Paris Agreement and the UN clients in adopting more sustainable business models Sustainable Development Goals. Several important and behaviours; banking sector initiatives for improving the alignment describe the Green Loan Principles, Social Loan of banks’ strategies and activities with green and Principles and Sustainability Linked Loan Principles; sustainable finance principles, promoting market and consistency and integrity and avoiding greenwashing cite examples and case studies of innovative are examined. These include the UN Principles for responsible, green and sustainable banking products Responsible Banking, the UN-convened Net Zero and services. Banking Alliance, and the Green Loan, Social Loan and Sustainability Linked Loan Principles. The growing number of green and sustainable banking products and services developed to encourage and support environmentally and socially sustainable economic activities are introduced and described. 234 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking 6.1 THE ROLE OF BANKING IN THE TRANSITION TO A National and multilateral development banks, such All types of retail and corporate banks, large and small, SUSTAINABLE, LOW-CARBON WORLD as KfW (the German Development Bank), the Asian play key roles in both “greening finance” and “financing Development Bank and the World Bank green” (terms introduced in Chapter 1) in the context of The banking system provides many critical services to aligning banking overall with the objectives of the Paris individuals, businesses and the economy and society Central banks, such as the Bank of England and the People’s Bank of China, which act as financial Agreement and the UN Sustainable Development Goals overall. These include taking deposits, creating and (SDGs). allocating credit, managing the payments system, services regulators and hold ‘lender of last resort’ underwriting securities, raising finance in capital markets, responsibilities offering savings and investment products, providing In this chapter, we introduce and provide an overview of advisory services, and undertaking research. In practice, green and sustainable banking products and services in many banks offer products and services across more retail, commercial and corporate banking, whilst Chapter than one of these functions. Some banks also offer other 7 considers the market for green bonds and other debt services, such as asset management, wealth management (‘fixed income’) securities in more detail. Central banks’ and insurance. role in development is covered separately in Chapter 8, The term ‘banking’ can be applied to a large range of and the use of FinTech tools and techniques in relation to financial institutions that cater to a diverse range of banking is explored further in Chapter 11. clients, regions and sectors, from large global banks Banks are the main source of credit for households and that serve multinational corporations across many firms in most economies, and play major roles in capital jurisdictions to small, mutually-owned building societies markets, too. Lending and investment decisions made and credit unions that serve local households and by banks therefore have material consequences on the businesses. Public banks also play important roles in environment – both positive and negative. Banks are many countries. uniquely positioned to reallocate credit and mobilise In this study guide we distinguish between the following capital away from environmentally harmful activities and four types of banks: towards green and sustainable projects and activities. By continuing to finance high-carbon, environmentally or Retail banks, primarily offering products and services socially damaging activities, however, banks contribute to individuals and small business customers (the latter to the acceleration and impacts of climate change, is sometimes referred to as ‘commercial banking’) – and to wider environmental and societal harms (e.g. these may include public and private banks, building deforestation and habitat loss). societies, credit unions and cooperative banks Corporate and investment banks (also called ‘wholesale banking’) serving larger, corporate clients and other financial institutions 235 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking Greening Finance Many banks now embed, or are in the process of QUICK QUESTIONS: WHAT ARE SOME OF THE WAYS IN embedding, environmental and other sustainability WHICH BANKS YOU ARE FAMILIAR WITH ARE ALIGNING factors into their strategies, activities and operations. This includes: THEIR ACTIVITIES WITH THE PARIS AGREEMENT AND THE UN SDGS? making public commitments to achieving net zero emissions by 2050, incorporating science-based Write your answer here before reading on. targets (see Chapter 4), and aligning lending and investment portfolios with global warming limited to 1.5oC above pre-industrial levels (see 6.2); integrating environmental, climate-related and other sustainability risk factors into banks’ risk management systems, especially credit risk management (as discussed in Chapter 5); developing and mainstreaming retail and corporate banking products and services that deliver positive environmental and/or social impacts alongside financial returns or other benefits for customers (these are introduced in 6.3 and 6.4); decarbonising lending and investment portfolios by reducing and/or refusing lending to high- carbon sectors and firms, especially thermal coal and, increasingly, other fossil fuels (combined with increasing lending to sustainable alternatives); and building institutional capacity, capability and cultures to support the above. 236 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking To date, the key drivers of this have been regulatory green commercial mortgages, green and social loans pressure and the mitigation of financial losses from and similar products (covered in section 6.4); CASE STUDY: SEB’S SUSTAINABILITY STRATEGY physical and transition risks. More recently, however, incentivising organisations’ transitions from high- to banks – especially those that are signatories to the low-carbon business models, technologies and SEB is a universal bank based in Sweden, with UN Principles for Responsible Banking, members activities via sustainability-linked and similar loans substantial operations in other Nordic countries of the Net Zero Banking Alliance and other similar (described in section 6.4); and and Germany, and a significant presence in groups - have been more proactively seeking to achieve corporate banking in many major global financial positive environmental and social impacts by including raising capital through equity IPOs for environmentally centres. sustainability in the design and delivery of an increasingly and socially sustainable firms and technologies, and wide range of retail and corporate banking products and underwriting the issue of green, sustainable and The bank has been a pioneer in many aspects of services. Another important driver is changing customer transition bonds to support more established firms green and sustainable finance. It helped develop sentiment and preferences, which banks wish to reflect and projects (green and other types of sustainable the World Bank’s first Green Bond in 2007, and and support by providing more environmentally and bonds are explored in detail in Chapter 7). was one of the founding signatories of the UN socially beneficial products and services. Banks are also Principles for Responsible Banking. The bank’s The key to successfully ‘financing green’ is engaging strategy, activities and operations seek to generate aware, and seek to take advantage of, the substantial with clients and customers, both with individuals (to positive environmental and social returns and to commercial opportunities presented by the economic understand and help shape their preferences for more minimise harm while providing financial returns for and societal transition to net zero, as outlined in Chapter environmentally and socially sustainable banking depositors, customers and investors. 1, both by developing new products and services and products and services) and with organisations (to by aligning their lending activities with sustainability (i.e. understand, assess and shape their plans for transition In 2021, SEB launched a refreshed sustainability ‘financing green’). to low-carbon business models and technologies). Banks’ strategy for the bank that forms part of its 2022- Financing Green role as trusted advisors to corporate clients in this 2024 business plan and is a cornerstone of its respect is vital, as banks’ can share their expertise in longer-term 2030 strategy. The new strategy Retail and corporate banks can mobilise private capital climate risk, scenario analysis, target-setting and other broadens the scope of SEB’s sustainability work for lending to and investment in environmentally and areas of developing credible transition plans with their (although it focuses initially on climate), clarifies socially sustainable activities through loans and other clients. Rapidly and robustly building capacity, capabilities SEB’s role in the transition towards a sustainable, debt products to households and firms, and through their and cultures to support the above within individual low-carbon economy, and further integrates advisory, intermediation and capital markets activities. institutions, and across banking as a whole, is needed, environmental and social sustainability into the These include: however, if banks, customers and clients are to achieve bank’s operations, products, processes and increasing lending to individuals and families that the objectives of the Paris Agreement and limit global decision-making. delivers positive environmental and social impacts, warming to 2oC and ideally 1.5oC above pre-industrial levels by mid-century. As part of SEB’s sustainability strategy, the bank such as green and retrofit mortgages and electric has set new ambitions and goals for reducing the vehicle loans (introduced in Section 6.3); bank’s exposure to fossil fuels, increasing lending prioritising lending to environmentally sustainable to environmentally and socially sustainable sectors sectors, firms, technologies and activities through 237 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking increased each year following the signing of the Paris and firms, and supporting the bank’s customers in “As a bank, we have the power, opportunity Agreement in 2015 to $824 billion in 2019, before falling their transitions to more sustainable, low-carbon back to $742 billion in 20212. and responsibility to impact the world we business models. Regular public reporting on operate in,” said Johan Torgeby, SEB’s President Civil society organisations play an important role in progress in the three areas below will be provided and CEO. “SEB wants to be a leading catalyst monitoring banks’ climate change, environmental and to enable the bank and its stakeholders to track in the sustainability transition. We have an social sustainability commitments. ShareAction’s 2020 progress: ambition to accelerate the pace towards a Banking on a Low Carbon Future report, for example, Carbon Exposure Index – “The Brown” - a volume- sustainable future for people, businesses compared and ranked the top 20 global banks in based metric capturing SEB’s lending to the fossil and society, and we believe we can make the terms of their sustainability commitments and fuel sector. The bank’s goal is to reduce fossil greatest positive impact for the climate by announcements, and action taken by them to implement fuel exposure within the bank’s energy portfolio, partnering with our customers and supporting these3. ShareAction found that, at that time, most of including power generation and distribution, as well the banks surveyed had not substantially aligned their them on their transition journeys. As the next as oil and gas, by 45-60% by 2030 compared with strategies, activities and operations with sustainability, step in our sustainability strategy, we have set instead opting for a business-as-usual approach. In a 2019 baseline. This approach means the bank will growth ambitions for our sustainable products, be in line with or outperforming the strictest 1.5oC 2021, ahead of COP26, ShareAction assessed how the 25 advisory services and investments while at the largest European banks approached critical climate and degree-aligned climate scenarios provided by the Network for Greening the Financial System (NGFS). same time laying out a clear and concrete path biodiversity themes 4, reporting that, although 20 of these for the reduction of our fossil credit exposure." had committed to net zero targets by 2050, very few had Sustainability Activity Index – “The Green” - a detailed plans in place to achieve them. Source: SEB (2021) SEB sets new climate ambitions and goals as part volume-based metric capturing SEB’s sustainability- of its sustainability strategy. Available at: https://sebgroup.com/ related lending and advisory activities, plus the press/press-releases/2021/seb-sets-new-climate-ambitions- Similarly, the Cambridge Institute for Sustainability bank’s Greentech venture capital investments. and-goals-as-part-of-its-sustainability-strategy [Accessed: 20 Leadership (CISL) found in its Bank 2030: Accelerating SEB’s aim is to increase average activity 6-8 times by January 2023] the transition to a low carbon economy report that banks 2030 compared with a 2021 baseline. needed to be more proactive in integrating sustainability into their strategic planning5. According to the CISL, most Transition Ratio – “The Future” - a volume- Despite the recent growth in green and sustainable banks continued to take a passive or ‘banking-as-usual’ based ratio based on SEB’s internal Customer finance, however, the banking sector still often approach to sustainability, preferring to be client-led Sustainability Classification Model, which will contributes to increasing greenhouse gas emissions rather than seeking to lead and support clients in their assess the bank’s and customers’ climate impacts and other environmental and social harms rather than transitions to net zero. and alignment towards the objectives of the Paris reducing them. In Chapter 1, we saw that some 60 global Agreement. This will help the bank get a better banks have provided financing of more than $4.6 trillion These are important concerns, and should not be understanding of customers’ transition journeys to the fossil fuel sector since the signing of the Paris dismissed. If banks continue to fund environmentally and the support needed to help them with these. Agreement in 2015, which substantially outweighs their and socially damaging sectors, firms, technologies and financing of sustainable, low-carbon alternatives1. Overall, activities, and do not genuinely align their strategies, bank lending and underwriting to the fossil fuel sector activities and operations with the objectives of the Paris 238 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking Agreement and UN Sustainable Development Goals, serving some 2 billion customers and clients worldwide Principle 2: Impact and Target Setting then banks and banking are, quite literally, unsustainable had become PRB signatories7. There is a significant We will continuously increase our positive impacts while - and can justifiably be accused of greenwashing. For a overlap in membership between the PRB and the UN- reducing the negative impacts on, and managing the risks whole-economy and whole-society transition to succeed, convened Net Zero Banking Alliance (NZBA), introduced to, people and environment resulting from our activities, banks must support their public commitments with in Chapter 3, and both are supported by the United products and services. To this end, we will set and publish detailed strategies, plans and targets that accelerate Nations Environment Programme Finance Initiative (UNEP targets where we can have the most significant impacts. both ‘greening finance’ and ‘financing green’, as set out FI). The NZBA – the banking constituent alliance of GFANZ previously, supported by investments in capacity and – focuses, as its name suggests, on climate, particularly Principle 3: Clients and Customers capabilities to ensure that these can be achieved in the on aligning banks’ lending and investment activities with We will work responsibly with our clients and our challenging timescales required. net zero emissions by mid-century using science-based customers to encourage sustainable practices and targets. The PRB encompasses climate as well as wider enable economic activities that create shared prosperity 6.2 UN PRINCIPLES FOR RESPONSIBLE BANKING AND aspects of environmental and social sustainability as set for current and future generations. NET ZERO BANKING ALLIANCE out in the UN SDGs. In practice, a bank that meets the commitments it has made in joining the NZBA will also Principle 4: Stakeholders 6.2.1 The UN Principles for Responsible Banking meet the requirements for PRB signatories in terms of We will proactively and responsibly consult, engage and In recent years, moves to align banking with climate. The Chartered Banker Institute was one of the partner with relevant stakeholders to achieve society’s environmental and social sustainability have gathered first non-bank endorsers to support the PRB, viewing goals. pace, driven by a combination of evolving policy and the Principles as entirely consistent with the Institute’s regulation, changing customer, employee and investor vision of banking as an ethical, socially purposeful and Principle 5: Governance attitudes, and in particular the recognition of the key sustainable profession. We will implement our commitment to these Principles role of banking in addressing climate change and other through effective governance and a culture of responsible sustainability issues. Amongst the most significant global The six Principles for Responsible Banking,8 which banking. initiatives, building on the Principles for Responsible signatories commit to embedding in their bank’s Investment (see Chapter 9) and the Principles for strategies, activities and operations across all business Principle 6: Transparency and Accountability Sustainable Insurance (see Chapter 10), is the UN areas, are as follows: We will periodically review our individual and collective Principles for Responsible Banking, (PRB) launched in 20196. Principle 1: Alignment implementation of these Principles and be transparent The PRB’s aim is to align banks’ strategies, activities and about and accountable for our positive and negative operations with the Paris Agreement and UN Sustainable We will align our business strategy to be consistent with impacts and our contribution to society’s goals. Development Goals (SDGs), and to provide a global and contribute to individuals’ needs and society’s goals as framework, a supportive peer network, and target-setting, expressed in the Sustainable Development Goals (SDGs), impact analysis and reporting mechanisms to support the Paris Climate Agreement and relevant national and this. regional frameworks. Within three years of the launch of the PRB (September 2022), more than 270 banks representing approximately 45% of global banking assets under management and 239 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking To help banks implement this substantial commitment ensure that the latter are linked to the former in terms of across their business activities, UNEP FI has developed a banks’ lending and investment activities. 3-step process comprising: To assist banks with target setting in several areas aligned 1. Impact Analysis with the UN SDGs, including biodiversity, climate, financial inclusion, gender equality and the circular economy, PRB signatories should analyse and identify the most UNEP FI has published a range of guidance to support significant impacts of their banks’ activities, operations, signatories11. products and services on society, the environment and the economy (both positive and negative), aligned with 3. Reporting the UN SDGs and working with internal and external stakeholders to do this. They should then identify areas PRB signatories are not required to produce a separate where their institution can make the greatest positive report on their activities relating to the PRB, but should impacts and reduce environmental and social harms include an annual assessment of alignment with and caused by current activities, prioritising the 2 most progress in implementing the PRB in existing public significant impact areas. reporting. Within 18 months of becoming a signatory, banks must publish their first self-assessment of their To assist banks with impact analysis, UNEP FI has alignment with the PRB. This should take the form of an published guidance to support signatories, developed initial impact analysis along the lines set out previously, by some of the initial PRB signatories who have already identifying their most significant impacts on society, the completed their initial Impact Analysis9. environment and the economy, and publishing at least two targets. 2. Target Setting Signatories have a four-year period in which to make PRB signatories should set at least 2 targets that address significant progress towards the targets, and should the significant impact areas identified during the Impact self-assess and report annually on this. Limited external Analysis stage. Targets should be SMART (specific, assurance of banks’ self-assessment is required. UNEP measurable, achievable, relevant and time-bound), FI has published guidance for banks and assurance interim milestones should be agreed, and suitable providers on PRB reporting,12 including a reporting and governance and reporting arrangements put in place self-assessment template. Some signatories choose to to oversee the achievement of the targets. According report separately using this; others to integrate PRB to the PRB, the majority (87%) of signatories are setting reporting within their external reporting to regulators, targets to address climate mitigation and adaptation, with investors and others13. financial inclusion a key area for just under half (45%) of banks,10 but signatories need to strengthen their impact analysis and target setting activities and, in particular, 240 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking The PRB are a set of organisational principles for banks. For the Principles to succeed in aligning banks’ strategies QUICK QUESTIONS: HAS YOUR ORGANISATION, OR and activities with the objectives of the Paris Agreement ORGANISATIONS YOU ARE FAMILIAR WITH, SIGNED THE and the UN SDGs, and to build and continue to support a global culture of responsible, sustainable banking, the PRINCIPLES FOR RESPONSIBLE BANKING? IF SO, CAN YOU PRB need to be embedded at the industry, institutional FIND THEIR REPORTS? and individual levels: Write your answer here before reading on. Industry level: policymakers, regulators and industry trade associations leading a collective approach to endorsing and implementing the PRB Institutional level: PRB signatories leading by example and sharing good practice Individual level: professional bodies and educators such as the Chartered Banker Institute bringing the PRB to life for banking professionals, embedding them in professional standards, education and training, and qualifications, and setting out how they can be demonstrated by bank staff in their day-to-day professional banking practice As we will see in Chapter 12, mainstreaming green and sustainable finance - including the PRB - needs to be led by individuals committed to change. This means changing their individual professional practice to align their day-to-day activities with sustainability, and seeking to align the practice of others in their organisation and, ultimately, the practice of the organisation itself. To support the implementation of the PRB, therefore, the banking sector requires increasing numbers of Green and Sustainable Finance Professionals with an understanding of the critical role of financial services in supporting the transition to an environmentally and socially sustainable world. Banking professionals need to acquire relevant knowledge and skills to be able to develop and deploy 241 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking financial products, services and tools that can mobilise Building on the work of the CCCA, NZBA members commit The NZBA’s commitment relating to setting mid-century, capital to support that transition, address climate-related, to aligning their lending and investment portfolios to limit 2030 and intermediary targets for decarbonising environmental and societal risks, and support customers global warming to 1.5oC above pre-industrial levels, and lending and investment portfolios is underpinned by and communities through their own transitions to more to: the Guidelines for Climate Target Setting for Banks, sustainable business and economic models. developed by UNEP FI (and also used by CCCA members transitioning operational and attributable GHG and other PRB signatories setting climate-related 6.2.2 The Collective Commitment to Climate Action and emissions from lending and investment portfolios to targets)17. The Guidelines set out 4 key principles: the Net Zero Banking Alliance align with the pathways to net zero by 2050 or sooner; In 2019, a leadership group of 38 banks formed the setting an interim 2030 target, with intermediary 1. Banks should set and disclose long-term, interim and Collective Commitment to Climate Action (CCCA)14 with the targets to be set every 5 years from 2030 onwards intermediate targets to support the objectives of the aim of fast-tracking the implementation of the PRB in towards the 2050 overall target; Paris Agreement and support the transition to net zero relation to climate. This was done to help banks more by 2050. focusing interim targets on priority sectors where the rapidly integrate the PRB into their own strategies, 2. Banks should use credible, science-based targets most significant impacts can be made; activities and operations, and to develop expertise, when setting these, to ensure alignment with the guidance and tools that could be shared with other PRB publishing absolute emissions and emissions intensity objectives of the Paris Agreement. signatories. In particular, the CCCA banks would set on an annual basis, and disclosing progress against a board-level reviewed transition strategy setting out 3. Banks should establish a baseline for current and publish targets for aligning lending and investment proposed actions and climate-related sectoral policies; emissions from lending and investment portfolios, and portfolios with the goals of the Paris Agreement, focusing and annually measure and report progress in reducing on the most carbon-intensive and climate-vulnerable these, encompassing clients’ Scope 1, 2 and 3 sectors within their portfolios. taking a robust approach to the role of offsets in emissions (there is a caveat “where data allows”, but transition plans16. it is also noted that coverage is expected to increase The CCCA has now been overtaken by the UN-convened Net Zero Banking Alliance (NZBA)15 introduced in Chapter 3, over time as this becomes more available). and UNEP FI now encourages PRB signatories to join the 4. Banks should regularly review targets to ensure NZBA, which currently (2022) comprises more than 100 consistency with current climate science, and update banks from 40 countries. As noted previously, the NZBA these as necessary. is the banking constituent alliance of GFANZ, and there is a very substantial overlap between PRB signatories and NZBA members, with the great majority of NZBA members being PRB signatories (although the converse is not the case). The NZBA commitment, though, is more rigorous and robust in terms of climate alignment than the PRB, and requires banks to have substantial expertise in climate impact analysis and target setting, as well as access to the data required to perform these. 242 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking New members of the NZBA, and PRB signatories joining the CCCA after April 2021, are expected to apply the Guidelines and set their first round of targets within QUICK QUESTIONS: HAS YOUR ORGANISATION, OR AN 18 months (i.e. by October 2022). Banks then have a ORGANISATION YOU ARE FAMILIAR WITH, BECOME A further 18 months to set targets for all or the substantial majority of the carbon-intensive sectors to which they are MEMBER OF THE NZBA? WHAT TARGETS HAS IT SET FOR exposed. Existing CCCA signatories (as of April 2021) have 2030? three years from the time of joining the CCCA to apply the Guidelines, and then a further 18 months to set targets Write your answer here before reading on. for carbon-intensive sectors. In setting and achieving targets for reducing emissions from lending and investment portfolios, NZBA members are not expected or required to divest from high- carbon sectors and firms or completely withdraw from lending to these. This could form part of a long-term decarbonisation strategy, but in recognition of the broader aspects of sustainability and the importance of ensuring a just transition, NZBA members are encouraged to work with clients and customers to support their transitions to more sustainable, low-carbon business models, and to design and deploy products and services that can support these, many of which we introduce next and in Chapter 7. 243 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking 6.3 RETAIL BANKING PRODUCTS AND SERVICES Extending credit: Retail banks (and other Mutuals: similar to cooperatives, but customers of organisations, including peer-to-peer lenders) mutuals automatically become members without Retail banking is the provision of products and services extend credit to individuals and SMEs through loan having to buy a share. Building societies in the UK are by a bank to individual consumers and small and and overdraft products. Without retail banks, it a type of mutual that traditionally focuses on providing medium-sized businesses (SMEs), rather than to large would be difficult for people to buy a home or for mortgages, although they also provide other retail corporations or other banks. Sometimes referred to small businesses to access working capital or make banking products and services. as ‘community banking’, the term is generally used to investments. As the major source of credit in most distinguish these banking services from corporate, Credit unions: a type of non-profit financial economies, banks play a key role in lending to both cooperative offering a restricted range of financial wholesale and investment banking, which we cover in 6.4. high- and low-carbon sectors and firms. It may also be used to refer to a division or department services to members within a community that share of a bank dealing with retail customers. With the growth Products and services provided by retail banks and other a ‘common bond’ such as living or working in a of digital banking, other organisations, including mobile providers to individuals include payments, current and particular geographical area, or working for the same phone operators and technology companies, may offer savings accounts, mortgages, personal loans, overdrafts organisation. These close relationships help them retail banking services such as online payments or and debit and credit cards. SMEs are offered a range of to assess loans and ensure repayment. In some consumer finance. Sometimes they do so in partnership business accounts, payment services, loans and asset countries credit unions focus on the needs of the most with established retail banks, and sometimes by finance. Retail banks can vary widely in scale; for example, financially marginalised, but in others (for example the competing against them. some operate globally, while others are limited to certain US) they may compete with other types of retail banks countries, regions or communities, and may take many for customers. In many countries they play a significant Retail banks and other organisations offering similar different corporate forms: role in improving financial inclusion and other social services play an important role in the financial system, sustainability goals. performing three main functions: Commercial banks: owned by shareholders with Microfinance institutions: specialise in providing (for the most part) the main objective of maximising banking services, and in particular credit, to individuals Deposit taking: Retail banks are where individuals and shareholder value. and small businesses that might previously have SMEs can safely deposit their money. Without banks, Cooperative banks: owned and controlled by been excluded from financial services. Although often people would have to store and protect their savings members on the basis of one member one vote, associated with the developing world, microfinance themselves, which would involve significant risks. rather than by shareholders in proportion to their institutions can be found worldwide. Whilst most Managing the payments system: Banks are shareholdings. Any customer can choose to become a microfinance institutions are funded or supported, at responsible for the payments systems used to settle member by investing a small amount of money in the least in part, by donors seeking to reduce poverty by financial transactions. Digital payments are becoming cooperative. Unlike commercial retail banks, however, improving access to financial services, in recent years more important as people use cash less, a trend that members of cooperatives cannot sell their stake to an increasing number of commercial microfinance accelerated during the COVID -19 pandemic. Mobile a third party and do not have any legal claim on the institutions have been established to take advantage operators, technology companies and FinTechs profits or capital accumulation of the bank. Cumulative of growing market opportunities. provide online payment services, either in partnership profits are owned by the cooperative itself and used to with established banks or as an alternative to reinvest in the business. traditional banks. 244 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking Public savings banks: have much in common with cooperative banks, but with key differences in ownership and governance. Their ownership QUICK QUESTIONS: HOW MIGHT THE DIFFERENT structures often reflect a public interest mandate, CORPORATE FORMS OUTLINED PREVIOUSLY AFFECT HOW meaning that they have a dual financial and social mission. Their assets are managed by trustees, often A BANK SEES ITS ROLE IN RELATION TO ENVIRONMENTAL under a stakeholder governance structure. Crucially, AND SOCIAL SUSTAINABILITY? however, nobody has ownership rights over profits or capital – the capital is in essence ‘unowned’. Write your answer here before reading on. 245 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking As retail banks tend (or at least seek) to have close As we will examine, both responding to changing relationships with their individual and small business customer preferences and seeking to influence customers, and in some countries may offer a wide range customer behaviour has led to the development of a of financial advice, they play a key role in understanding growing range of retail banking products and services customers’ evolving needs, expectations and sentiment. to encourage and support more sustainable customer Small community banks and credit unions might do this behaviour. The rapidly developing and growing market by meeting customers face-to-face; large retail banks for green and sustainable retail banking products utilise ever-increasing sources of customer data to means, however, that the risks of both inadvertent and generate insights into emerging preferences and needs. deliberate greenwashing, examined in earlier chapters, Retail banks (and other organisations offering retail are magnified. In particular, banks and bankers must banking services) are well placed, therefore, to identify take care to ensure that, whilst a particular product may and respond to changing customer attitudes towards the support positive environmental and/or social impacts, environment and social sustainability. this should not be used to deflect from environmental or social harms caused by an institution’s other activities – Retail banks and other organisations providing similar especially if these substantially outweigh the benefits. services can also adopt a more active approach, and rather than responding to changing customers preferences can seek to influence customer behaviour. In the context of sustainability, banks can help lead customers towards more sustainable consumption and spending by offering products and services that enable them to track spending and to save, invest and borrow in ways that generate positive environmental and social impacts. Signatories to the PRB and NZBA members need to adopt a pro-active approach in order to meet their commitments to align their strategies, activities and operations with the objectives of the Paris Agreement and the UN SDGs. 246 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking QUICK QUESTIONS: THINK ABOUT THE BANK WHERE YOU HOLD YOUR CURRENT ACCOUNT, AND/OR A PAYMENT SERVICE YOU USE REGULARLY. WHAT, IF ANYTHING, ARE THEY DOING TO PROMOTE ENVIRONMENTAL AND SOCIAL SUSTAINABILITY THROUGH THE PRODUCTS AND SERVICES THEY OFFER? Write your answer here before reading on. 247 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking 6.3.1 Current accounts, cards and payment services In recent years, many banks have introduced ‘green’ debit A current account, also known as a checking or demand deposit account, makes funds available to the account owner on and credit cards that typically offer a small donation to demand with immediate access to withdraw cash or make payments. Both personal users and businesses need some an environmental charity on every purchase, balance sort of current account to manage their day-to-day banking. Some banks offer ‘sustainable’ current account products transfer or cash advance made by the card owner. In that enable customers to influence how their deposits are used, as the short Ekobanken case study below describes. some cases, estimated emissions for purchases made via credit and debit cards can also be offset. The extent to which such cards can be classified as ‘green’ is subject CASE STUDY: EKOBANKEN to debate, however. Whilst they may provide a small environmental benefit via donations, cards may also Ekobanken is a small Swedish co-operative bank founded in 1998; it is owned by its members (i.e. depositors) and incentivise the consumption of high-carbon goods and is a member of the Global Alliance for Banking on Values (GABV). The bank has a mission-led approach to lend services (e.g. air travel, petrol, and diesel), and so overall funds to support activities that further ecological, social, cultural and economic sustainability, and seeks to attract may cause more harm than good. depositors who want to be able to influence how their money is invested. To overcome this drawback, some banks and providers The bank allows retail clients to choose how their deposits are used. Depositors can either decide that their money have developed credit and debit cards that can link is used to support Ekobanken’s general lending, which is focused on firms and activities that create environmental, purchases and emissions. By reporting the greenhouse social or cultural added value, or they can choose specific sectors within these categories where they would like gas emissions generated by purchases to card holders, their funds to be invested. Members receive regular information on loans granted. Funds can be earmarked, this may overcome the tendency of cards to promote therefore, for specific lending to, for example, climate mitigation or social care. This would be much more difficult unsustainable consumption. One such card, issued by for a larger bank to achieve, as matching depositors’ preferences with lending activities on a large scale would be the Swiss Cornèr Bank, is described in the short case extremely challenging. study on the next page. Furthermore, Ekobanken offers accounts with or without interest. If they wish, depositors can refrain from collecting interest; this makes it possible for the banks’ clients to receive loans at a lower interest rate. A deposit in Ekobanken therefore gives a two-fold return: an economic return, and an impact return. Source: Ekobanken (2021) About Ekobanken (online). Available at: https://www.ekobanken.se/sv/om-oss/om-ekobanken [Accessed: 20 January 2023] Credit and debit cards are an important part of the global banking and payments systems, and significantly exceed the value of payments made with cash. The COVID -19 pandemic further accelerated the transition to card and online payments in many countries, although it is important to recognise that the cash payments and services associated with these (e.g. the ability to deposit cash in a bank account) remain important - and often essential - for some individuals, businesses and communities 248 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking Current accounts, and the payment cards linked to Alipay and similar large payment services providers to CASE STUDY: CLIMATE CREDIT CARD these, are increasingly accessed online and/or via mobile understand and shape consumer behaviour in many banking apps, which enable customers to manage their respects, including in the area of green and sustainable The Cornèr Bank/South Pole Climate Credit Card everyday banking activities via smartphones and other finance, as the following case study demonstrates. enables users to track both their spending and devices. The use of digital finance (“FinTech”) tools and the environmental impact of their purchases. techniques enables banks and others to offer products CASE STUDY: ANT FOREST In addition, CO2 emissions from spending are and services that integrate environmental and other calculated and offset. There are 2 types of cards sustainability data to help customers make and support Launched in 2016, Ant Forest (China) is a personal available: one for business use and one for private more sustainable consumption choices (e.g. carbon carbon account hosted on Alipay, the world’s clients. The more often the card is used for footprint trackers linked to banking apps), as we will see most popular payment app, which has more than business or personal purchases and services, the next and examine in Chapter 11, which looks at the use 1 billion users. It is designed to encourage users greater the amount of harmful global emissions that of digital finance and FinTech to support and grow green to reduce their personal carbon footprint, and can be offset. and sustainable finance in more detail. more generally to consider the impact of their activities and purchases on the environment. It The Climate Credit Card offers: The growth of digital finance and FinTech, particularly combines behavioural ‘nudges’ for Alipay users with in developing banking markets including in Africa and gamification and satellite monitoring to change Automatic capture and calculation of CO2 China, has seen ‘traditional’ current account banking consumer behaviour, reduce carbon emissions and emissions of all purchases on the card replaced and/or supplemented by online and mobile increase reforestation. A monthly statement of expenses and an annual payment services. Amongst the best known of these statement of CO2 emissions generated are Alipay, Paypal and MPesa, the latter a mobile phone- Ant Forest offers 16 different ways users can reduce Offsetting of emissions through emissions based money transfer service operating in several African their carbon footprint, including by using public reduction projects, at no additional cost to the countries, India and the Balkans. MPesa has played a key transport, paying bills online and cutting down on cardholder role in the countries where it operates in significantly their use of paper at home and at work, all tracked enhancing financial inclusion, giving many millions of through Alipay. Users claim carbon points for their According to South Pole, “with free yearly reports individuals, families, farmers and businesses access to activity and save these to their personal carbon on the total CO2 emissions associated with purchases, payment services, lending and insurance that they had account. Carbon points are converted into virtual users can see their shopping directly translate into previously been unable to benefit from. ‘green energy’ which is used to water and grow positive environmental impacts. Corporate clients can virtual saplings in the Ant Forest app; gamification use this innovative and award-winning product to Using digital payment apps and similar products to encourages users to compete to grow their virtual meet their sustainability commitments, engage with promote more sustainable consumption choices and/ saplings and share their progress with family, employees and impress stakeholders, while having all or offset emissions from purchases is another area of friends and others. When enough ‘green energy’ the benefits of a high-performance credit card. This rapid development. A leading example is Ant Forest, has been accrued to grow a virtual tree, this is small card can make a huge difference in making this part of Alipay, the world’s largest online and mobile converted into the planting of a real tree. Some of world a better one to live and do business in.” payment provider and part of the Ant Financial Services the planting is monitored via satellite and drone, Group, one of the largest financial services firms in the allowing Ant Forest users to see the progress and Source: www.southpole.com/clients/climate-credit-card-make- world, based in China. The size of their user base enables expenses-climate-neutral [Accessed: 20 January 2023] results of tree planting in desert regions in Inner Mongolia, for example. 249 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking Banks such as the Bank of Aland (Finland), Nordea 6.3.2 Savings products The size and scale of the Alipay payment platform (Sweden) and NatWest (UK) have launched CO2 trackers Retail banks – and other providers offering retail banking enables Ant Forest to have a significant impact on linked to their mobile and digital banking apps, helping services - typically offer customers a range of savings consumer behaviour and carbon emissions, with customers see the impact of their consumption decisions accounts and products that pay a higher rate of interest some 500 million users of the Ant Forest app as of on their carbon footprints, as described in the case than on-demand current accounts, though customers August 2019: study in Chapter 11. Carbon footprint trackers such as typically do not have immediate access to the money these help incentivise more sustainable consumption they invest in savings products. Savings products include A total reduction in carbon emissions of 1.22 decisions and promote behavioural change both by investment accounts, term deposit accounts, and savings million tonnes CO2e were achieved in the first providing real-time (or close to real-time) information to bonds. In many countries, retail savings products attract year of Ant Forest’s operation. inform decision-making, and also through gamification tax benefits to incentivise household saving. More than 120 million real trees had been that encourages users to reduce their carbon footprint planted by Ant Forest by August 2019, covering month-by-month and compare their progress with Some banks offer green and sustainable savings more than 100,000 hectares. friends and family. Some CO2 trackers also provide a products that enable customers to direct their savings facility for customers to offset their carbon emissions. towards environmentally and socially sustainable Source: https://unfccc.int/climate-action/momentum-for- For retail banks, integrating a carbon footprint tracker lending and investment. These may be products that change/planetary-health/alipay-ant-forest [Accessed: 20 into mobile banking apps helps them build stronger and contribute towards the financing of sustainable projects January 2023] stickier customer propositions, and encourages the use or businesses directly, or products that invest savings in of the bank’s app(s) and payment services, rather than investment funds with a green and/or sustainable focus, those of competitors. as described in the four short case studies on the next page. 250 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking QUICK QUESTION: WHICH OF THE FOLLOWING PRODUCTS/APPROACHES DO YOU THINK IS THE MOST EMBEDDED IN TERMS OF ALIGNING A BANK’S ACTIVITIES WITH SUSTAINABILITY? WHY? Write your answer here before reading on. 251 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking CASE STUDY: CIMB ECOSAVE SAVINGS ACCOUNT In 2020, for example, CIMB committed RM 1 million Recognising its leadership in India in green and (approximately $250,000) per year for 3 years to sustainable finance, in November 2019 YES BANK Commerce International Merchant Bankers Berhad support conservation efforts in the Setiu Wetlands, was approved as an accredited entity by the (CIMB) is a large Malaysian-based bank operating in partnership with WWF Malaysia. UNFCCC-led Green Climate Fund, established in 18 countries in Malaysia and the ASEAN region. It to support developing nations in responding offers both regular and Islamic banking services. Source: CIMB (2022) https://www.cimb.com.my/en/personal/ to climate change. As an accredited entity, the day-to-day-banking/accounts/savings-account/ecosave- savings-account-i.html [Accessed: 20 January 2023] bank will develop and implement climate change The EcoSave account – considered to be the mitigation and adaptation projects funded by the first environmentally-focused savings account in Green Climate Fund. YES BANK was also one of Malaysia - is a Shariah-compliant savings account the founding members of the UN Principles for that enables savers to invest funds to earn a profit Responsible Banking, and the only Indian bank (Islamic savings products do not pay interest, but CASE STUDY: YES BANK GREEN FUTURE DEPOSIT amongst these. the profit share is a similar concept that rewards CERTIFICATES savers with profit rates of between 0.15% and 1% YES BANK aligns its strategies, activities and per annum). There is a minimum deposit of RM 250, On World Environment Day in June 2018, India’s products and services more broadly with the and customers who maintain an average monthly fourth-largest private sector bank, YES BANK, UN SDGs through the “Circle of Goodness”, balance of RM 5,000 receive a monthly cash launched its innovative ‘Green Future Deposit’ incorporating a range of initiatives to create positive incentive of RM 5. savings product. The 18-month, fixed-term deposit environmental and social impact: scheme offers high rates of interest (up to 7.5% The account’s environmental benefits come in two p.a. and up to 8% for senior citizens), and allocates Funding measures to address biodiversity loss forms: the funds raised to invest in projects and sectors and promote conservation aligned with the UN Sustainable Development Goals Providing clean and safe drinking water at railway Unlike competing savings products, the account (SDGs). stations and other locations across India is completely paperless (no passbooks, physical bank statements or customer mailings – a Speaking about the Green Future Deposit scheme, Funding and providing advice to Indian SMEs on monthly e-newsletter on CIMB’s environmental the CEO of YES BANK, Rana Kapoor, said, “YES BANK improving energy efficiency and environmental activities is distributed electronically). has established itself as India’s pre-eminent Green Bank sustainability 0.2% of the total EcoSave average portfolio with pioneering initiatives in the Sustainable Finance Conducting climate literacy workshops to raise balance is contributed by CIMB to support a domain. YES BANK has been a strong proponent of awareness of climate change and related issues range of environmental activities, including sustainable banking and has been at the forefront of reforestation and the sustainable management supporting the ‘Green Good Deeds’ campaign that was Source: YES BANK (2018) Yes Bank Launches Green Future: recently launched by the Government of India. The Deposit, India’s First Ever Green Deposit Product (online). Available of wetlands. at: https://web.archive.org/web/20201129203838/https:// new Green Future: Deposit is an important step in this www.yesbank.in/media/press-releases/yes-bank-launches- direction, and the first of many green retail products green-future-deposit-indias-first-ever-green-deposit-product that will be launched by YES BANK in this financial [Accessed: 20 January 2023] and author’s own materials. year”. 252 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking CASE STUDY: GREEN ISAS IN THE UK CASE STUDY: UBANK GREEN TERM DEPOSITS In the UK, an ISA (individual savings account) is a savings account that enables individuals to save or invest money – UBank is the “direct banking” (i.e. accessible online currently up to £20,000 per year – without paying tax on the interest or on the capital gains received. Some banks and via telephone only) subsidiary of National and other financial institutions offer ISAs that invest in green and environmentally sustainable areas. As with other Australia Bank. In 2019, UBank launched a small investments labelled ‘green’ or ‘sustainable’, care needs to be taken by investors and advisers to ensure that the range of Green Term Deposits, described as component parts of these are genuinely sustainable. Examples of genuinely green and sustainable ISAs in the UK the “world’s first consumer Green Term Deposit include: certified by the Climate Bonds Initiative”; it targets depositors seeking to align their savings with Ecology Building Society Cash ISA environmentally positive outcomes, a growing The Ecology Cash ISA enables individuals to save in a straightforward, no notice savings account. The main segment in Australia. difference between the Ecology Cash ISA and similar Cash ISAs and other savings products offered by mainstream banks is that the deposits received are used to fund mortgages for projects that make a positive environmental With a minimum deposit of AU$1,000 and/or social impact. In 2020, the Ecology Building Society lent nearly £40 million to support 230 sustainable (approximately $700) and term options of between properties and projects. 2 and 11 months, interest rates on Green Term Deposits are similar to UBank’s other term deposit Source: www.ecology.co.uk/savings/savings-accounts/ecology-cash-isa/ [Accessed: 20 January 2023] products. When a saver invests funds in a Green Term Deposit, though, NAB earmarks these funds Abundance Innovative ISA for environmentally sustainable lending by holding The Abundance Innovative ISA takes advantage of a new type of ISA introduced by the UK Government in 2016 to at least an equal amount in a pool of lending for encourage peer-to-peer and other alternative forms of lending. Abundance is not a bank, but by offering peer- projects and assets that will be certified under the to-peer lending in the form of the Innovative ISA, it performs one of the key functions of a bank – the provision Climate Bonds Standard (introduced in the following of credit. The Abundance Innovative ISA provides savers with a choice of investments in companies and councils Chapter, but in brief this ensures lending is used for (municipalities) undertaking climate change mitigation and adaptation activities. Investments include renewable genuinely environmentally sustainable purposes). energy projects such as wind, solar and marine, and other projects focused on social sustainability. Investors can choose the projects that appeal to them most, and build their own portfolios to match their financial and Source: https://www.ubank.com.au/term-deposits/green [Accessed: 20 January 2023] sustainability preferences. In the first year of the Green ISA’s operation (2016-2017), Abundance attracted more than 1,400 investors with a total investment of £10.5m. By 2020, a total of 46 projects had been funded with more than £100m invested. Many of the investments offer relatively high returns of 10% to 12%; this reflects the higher risks involved, however, and whilst investments are vetted by Abundance, the risk of impairment or default is higher than for many traditional ISAs. Source: www.abundanceinvestment.com [Accessed: 20 January 2023] 253 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking 6.3.3 Green and retrofit mortgages have lower utility bills, and homeowners should therefore Residential homes account for a substantial proportion have higher levels of disposable income with which to for green mortgages means that Barclays can still of CO2 emissions. Direct and indirect emissions from service their mortgages. Of course, it might also be that make an acceptable return despite the discounted buildings were estimated as 23% of total UK emissions purchasers of energy-efficient homes are more likely to interest rate. In addition, some of the proceeds of in 2019, with residential buildings accounting for more have higher disposable income to begin with and are less Barclays’ 2017 green bond issues are being used to than three quarters of this, according to the UK Climate likely to default on their mortgage payments overall. support the development of its green mortgages, Change Committee18. The IPCC reported that residential in addition to refinancing low-carbon residential buildings accounted for some 24% of global energy use properties more generally, in England and Wales. CASE STUDY: BARCLAYS GREEN MORTGAGES in 201019. For many national and regional governments, Having pioneered the market for green mortgages cutting emissions from housing is seen as a key priority to In 2018, Barclays launched the UK’s first Green in the UK, Barclays have inspired other lenders to help them meet national and international commitments Mortgage for purchasers of new, energy-efficient follow suit, and as of 2022 there are nearly 40 green to reduce emissions, with building codes and other homes. mortgages now available in the UK, according to the legislation/regulation being updated to reflect this. Green Finance Institute. The original scheme was successfully trialled with ‘Green mortgages’, a term used mainly to refer to a small group of housebuilders, so now Barclays Sources: Barclays (2018-22) https://www.barclays.co.uk/ mortgages on new, energy-efficient homes, are one way Green Mortgages are available to customers mortgages/green-home-mortgage/ and Green Finance Institute of incentivising the purchase of lower emission homes, purchasing any new-build home from a builder or (2022) https://www.greenfinanceinstitute.co.uk/programmes/ ceeb/green-mortgages/ [Accessed: 20 January 2023] and have been launched in recent years in countries developer with an Energy Performance Certification including the US, UK, Sweden, the Netherlands and (EPC) rating of A or B. Green Mortgages are Australia. They are an example of the ‘green tagging’ of available for fixed terms of 2 or 5 years, and for In many countries, some of the greatest climate change loans, whereby the terms of the loan are linked to the up to 90% loan to value (LTV). In 2022, the bank mitigation benefits (in terms of reducing greenhouse underlying asset’s energy performance, fuel efficiency or launched a similar range of Green Mortgages for gas emissions from residential sources) will come from environmental standards. In general, green mortgages small buy-to-let investors, for up to 75% LTV. increasing the energy-efficiency of existing housing offer borrowers below-market interest rates for stock through improving glazing and insulation and purchasing new, energy-efficient homes, as described in Homeowners benefit from preferential interest replacing oil and gas-fired boilers with heating powered the Barclays Green Mortgages case study opposite. rates – a 0.1% discount compared with the standard by renewable-generated electricity, hydrogen, or ground Barclays mortgage products. At launch, the bank source heat exchangers. Some lenders, therefore, offer In general, green mortgages are offered at slightly lower claimed that the discounted interest rate plus the green mortgages that incentivise energy efficiency interest rates than conventional mortgages in order to energy savings from a more efficient home could improvements in existing properties, known as “retrofit reflect the lower risk profile of green mortgage customers save a typical 3-bedroom UK household £1,335 over mortgages”. The UK’s Ecology Building Society, for and/or the presence of government incentives. There is five years. example, offers a “C-Change Discount” that rewards some evidence from the US,20 UK 21 and the Netherlands22 borrowers with interest rates reduced by up to 1.5% that owners of more energy-efficient homes are less Using data on mortgage defaults from the US and when energy efficiency improvements are made23. likely to default on their mortgage payments, justifying the UK showing that owners of energy-efficient From a technical perspective, most older properties a lower rate of interest. This might be because energy homes are less likely to default, the lower credit risk can be retrofitted to improve energy efficiency, but it efficiency lowers energy use, energy-efficient homes is expensive to do so in terms of the upfront capital 254 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking costs of replacing gas central heating with hydrogen or heat pumps. Significant annual savings in energy costs CASE STUDY: EUROPEAN ENERGY EFFICIENCY The consortium includes the World Green Building should accrue over the long-term, however, supporting MORTGAGE Council, RICS, E.ON, the University of Ca Foscari mortgage or loan repayments, and generating returns (Venice), Goethe University (Frankfurt), and a for both lenders and borrowers, as well as environmental The European Energy Efficient Mortgage Initiative number of leading banks across Europe, who will be benefits. brings together a consortium led by the European piloting the scheme and working to substantiate the Mortgage Federation (EMF) and funded by the correlation between a property’s energy rating and A similar model – financing higher capital expenditure to EU’s Horizon 2020 Programme to develop a the financial performance of the mortgage. be repaid though lower operating expenditure - supports standardised energy-efficient mortgage based many aspects of green lending - whether on the retail on preferential interest rates for energy-efficient Source: Better Building Partnership (2017) Beyond Risk side as in mortgages, or in corporate banking in lending homes and renovations resulting in improved Management: How Sustainability Is Driving Innovation In Commercial Real Estate Finance (online). Available at: https://www. to finance the construction and operation of renewable energy efficiency. The initiative is premised on the betterbuildingspartnership.co.uk/sites/default/files/media/ energy generation such as wind farms or solar farms. belief that mortgage lenders ‘can play a game- attachment/BBP_BeyondRiskManagement_Insight_Final.pdf changing role in providing long-term financing for [Accessed: 20 January 2023] The UK’s Green Finance Institute has established the energy improvements to the existing European Coalition for the Energy Efficiency of Buildings (CEEB) housing stock’. to develop the market for, and financial products and services to support, the retrofitting of residential The underlying concept is that mortgage lenders As well as offering green mortgages and other loans to buildings. In 2020, the Institute published the Green in the EU will offer households the possibility support improvements in residential buildings’ energy Home Finance Principles, which provides a consistent of a preferential interest rate and/or additional efficiency, lenders need to monitor and report the methodology for the financing of residential retrofitting funds at the time of origination of the mortgage/ environmental impacts of their lending to ensure it is works24. These are similar in many respects to the Green re-mortgage in return for making energy-efficient having the reductions in greenhouse gas emissions Bond and Green Loan Principles described elsewhere improvements to the property. intended. In Chapter 4, we introduced the Partnership for in this study guide, with core components requiring the Carbon Accounting Financials (PCAF), which provides a transparent disclosure of the use and management of A standardised approach to the provision of standardised methodology for financial services firms to proceeds, project selection, and reporting. mortgage financing for energy-efficient investment track Scope 3 financed emissions. Residential mortgages will also ensure the ultimate ‘pricing-in’ of the added are one of the six asset classes PCAF currently supports, Whilst the term ‘green mortgage’ is becoming more value triggered by improvement measures. The and financial institutions are strongly recommended popular, and seems to resonate with potential customers, proposed mechanism rests on two key assumptions to implement PCAF to track their progress in reducing banks may also integrate aspects of a green mortgage regarding the market characteristics that will be financed emissions from mortgage lending. According to into more traditional mortgage lending. A property’s tested by the initiative: Kees van Dijkhuizen, CEO of Dutch bank ABN AMRO: current energy efficiency and/or plans to improve energy efficiency might be factored into affordability calculations, 1. Retrofitting impacts positively on property value, “Our experience in the Netherlands is that measuring for instance, enabling a lender to offer a higher overall ensuring wealth conservation and loss mitigation and tracking climate impact drives concrete action and sum or loan-to-value ratio (or, as in the case of the by preventing ‘brown discount’. change. [...] PCAF helped us understand that our nearly C-Change Discount described previously, a lower interest 2. Energy efficiency leads to a reduction in the 800,000 residential mortgages are one of the areas that rate). impact of energy costs on income, reducing the borrowers’ probability of default. 255 | Principles and Practice of Green and Sustainable Finance Unit 6: Responsible Retail, Commercial and Corporate Banking have the highest carbon impact. With that knowledge, we now promote mortgages that incentivize customers CASE STUDY: BANK AUSTRALIA CASE STUDY: ENERGY SAVING TRUST to take energy efficiency measures. Climate action like that is not only good for business - but is a duty to our Bank Australia links all car loans to the Funded by Transport Scotland (a Scottish environmental impact of the vehicle being government agency), the Energy Savings Trust can clients, the planet, and to future generations.”25 purchased, both for petrol and diesel vehicles help you purchase a new electric car. Drivers in 6.3.4 Electric vehicle financing and for low/zero emissions vehicles. The latter Scotland can benefit from zero-interest, six-year qualify for lower interest rates (with a discount of loans of: Globally, transport contributes more than 25% of global approximately 1% compared with loans for petrol greenhouse gas emissions, with the world’s 700 million up to £28,000 to cover the cost of purchasing and diesel vehicles). Interest rates vary, however, road vehicles, together with vehicle manufacturing, a new “pure” electric vehicle (i.e. not including depending on the type of vehicle and its emissions. estimated to be responsible for some three quarters of hybrids) this26. It is expected that global car ownership will triple Bank Australia also commits to offsetting 100% by 2050, and so incentivising the purchase or leasing of up to £10,000 to cover the cost of purchasing a of a vehicle’s CO2 emissions for the term of the new electric motorcycle or scooter environmentally-friendly vehicles is crucial for reducing customer’s loan by purchasing carbon offsets greenhouse gas emissions. One way that the banking eligible under the Australian National Carbon Offset Similar loans of up to £20,000 for second-hand pure sector can help to do this is by offering green electric Standard (NCOS). electric vehicles are also available, with a repayment vehicle loans and other forms of finance (e.g. electric period of 5 years. vehicle leasing) usually available to both individual and Source: Bank Australia (2022) Car Loan (online). Available at: https://www.bankaust.com.au/personal/borrow/personal- business customers. Loan pricing that varies according Source: https://energysavingtrust.org.uk/grants-and-loans/ loans/car-loan/ [Accessed: 20 January 2023] to emissions, and loans that offset emissions from petrol electric-vehicle-loan/ [Accessed: 20 January 2023] and diesel vehicles, are also available. Green car loans are another example of ‘green tagging’, whereby customers are incentivised to purchase low or zero emission vehicles at below-market interest rates. Lower interest rates reflect the lower risk profile of green car loans (as borrowers will have lower operating costs and electric or hybrid vehicles have higher resale values) and/or the presence of government incentives to supp