Green Money – Banks Lead the Way in Profiting From Sustainability

At first blush, what it means for a bank “to go green” may not be immediately clear. Banks do not operate factories or power plants that release pollutants into the air, nor do their supply chains require large amounts of materials that have large environmental footprints. In fact, the sum of a bank’s impact might seem to be simply their offices, retail branch locations, and some IT facilities.

In the United States, we’ve heard the joke that “dollars are already green” and a bank environmental program requires only a few recycling bins, customer paperless billing, and a bike rack in front of the office tower. In fact, environmental sustainability for banks is a core business issue – one which can affect facilities management, lending decisions, underwriting criteria, government relations, and brand management.

Most importantly, sustainability has been proven to be a profitable paradigm. For example, an iconic study by think tank AT Kearny analyzing bank performance during the global economic crisis of 2008-2009 found that financial services providers focused on environmental sustainability outperformed their peers by 25%, in terms of market capitalization over a 6-month period.

So what qualifies as a comprehensive environmental strategy for a bank? Consider some of the initiatives at Citi, recently ranked by Bloomberg Markets as among the top 10 greenest banks in the world:

Greenhouse Gas Monitoring and Reduction

Citi employs staff dedicated to monitoring, managing, and reporting its energy use and greenhouse gas emissions related to its operations around the world. At present, the bank is on track to meet a goal of reducing its GHG emissions 10% from 2005 levels by this year.

This goal is accomplished through aggressive energy saving and green building efforts in Citi’s offices, branches, and IT infrastructure and is resulting in significant cost savings. For example, Citi is saving over US $1 million per year in power and cooling from server efficiency programs in North America alone. Savings from other green IT efforts, the bank’s 170 certified green buildings, employee energy training, and other initiatives are saving Citi many millions more.

Here in Indonesia, where energy intensity per unit of GDP is over 1.8x that of other regions, it is worth considering the savings realized from a similar focus on efficiency. BNI seems to be hearing this call; the bank is monitoring the resources used at its head office (for reference, the 275,298 kwh which the BNI head office consumed last year has about the same GHG footprint as a railcar of coal) and has begun a fairly extensive campaign engaging its employees to save energy and money.

Financing Climate Adaptation and Mitigation

Citi has committed to investing US $50 billion in climate change solutions. This initiative, which is common at other major banks and financial services providers including HSBC and Mitsubishi, means that Citi is making a conscious effort to direct its products toward promoting a more sustainable future by investing in renewable energy, green buildings, carbon abatement, sustainable agribusiness, and other environmentally preferable areas.

While this capital commitment is great public relations fodder for Citi, it is also a strategic play to develop or protect its positioning in strategic market segments. A recent study by Accenture and Barclays found that global capital demand for transitioning to a lower carbon economy will top US $4.1 trillion in the coming years and concluded that “financing low carbon technology represents a unique opportunity for banks to benefit from significant growth of the low carbon technology sector whilst demonstrating a positive contribution in tackling climate change.” Citi’s initial US $50 billion commitment represents an early effort to understand and build finesse in the enormous market for climate change solutions.

In the domestic context, BNI is once again worth noting. In addition to complying with CSR lending requirements, BNI has set a Rp 2 trillion commitment to investing in climate change solutions. The bank’s green lending takes the form of green home loans, investment in pollution abatement, and clean development mechanism projects, among other areas. Like Citi, BNI is moving to understand and capture the market for green financial services.

Environmental Risk Management Criteria

As the underwriters of projects and organizations across industries and geographies, financial services providers have a distinct need to understand how changing environmental conditions and expectations will affect their investments. Toward this end, Citi developed an Environmental and Social Risk Management Policy in 2003, and has provided training to over 3,600 of its employees on managing such risks. The bank was instrumental in the creation of the Equator Principles, the globally referenced credit risk management framework for determining, assessing and managing environmental and social risk in project finance transactions. Citi also participates in a number of other environmental underwriting risk management protocols and stakeholder engagement programs including the Carbon Principles and Clinton Climate Initiative.

So how exactly do ESRM criteria affect lending? Take the example of a palm oil plantation operator who came to Citi for a loan; under the bank’s environmental risk management policies. Citi worked with the operator to review its forestry concessions, develop a 3-5 year pathway to join the Roundtable on Sustainable Palm Oil (RSPO) and work toward certification, and implement an environmental practice monitoring system at its plantations.

Although these criteria added an extra layer of diligence to the deal, they help to ensure the long term success of the operator in selling to increasingly sustainability-concerned downstream companies and protect it (and Citi) from potentially damaging exposure related to environmental mis-management. In palm oil and other sectors, Citi’s strong environmental underwriting principles protect both the bank and its clients.

Turning once again to local sustainability champion BNI, the bank is going beyond the environmental impact analyses required by various levels of government to integrate environmental assessment parameters into its customer risk rating and customer credit rating procedures. Additionally, BNI participates in a variety of high profile stakeholder forums on sustainability-oriented underwriting including participation in the United Nations Environmental Programme Finance Initiative and its founding member status of the Indonesia Business Council for Sustainable Development. Like Citi, BNI realizes that understanding evolving environmental expectations and risks are critical to success in this century.

Greener Banks for Indonesia

Banks are not power plants, steel mills, or plantations; their direct environmental footprints are much smaller than those of many of their clients. However, financial service providers can realize savings from reducing their own impacts. More importantly, banks underwrite nearly all other industry sectors. As such, they share in the environmental risks which their clients face and can profit from helping them to manage and mitigate these risks while moving to capture the emerging opportunities in shaping a lower carbon economy.

In Citi, we can see a global leader in the financial services sector aggressively moving to manage its environmental footprint, understand and profit from the green revolution, and protect itself from new environmental risks. Citi is not acting alone; its peers around the world are seeing the same trends and are taking similar actions. In particular, it is worth reviewing the sustainability efforts of HSBC, RBS, and Standard Chartered and considering how the commitments these banks are making will affect their own operations, and those of their clients.

Indonesian banks have taken less direct action to adopt environmental strategies which leverage stewardship to drive the bottom line and accomplish their organizational missions. BNI is a notable exception in the work it has begun in this area, but other domestic banks might do well to look at what their global counterparts are doing. As Indonesian banks continue to expand their presence in other markets, and as local focus on environmental issues continues to build, now is the time for Mandiri, BCA, and others to actively consider integrating green values across their operations.

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