Table of Contents
- Recommendation
- Take-Aways
- Summary
- Banks must recognize their corporate social responsibility in their net-zero strategies.
- “A just transition” addresses the impacts of climate change mitigation.
- The Glasgow Financial Alliance for Net Zero (GFANZ) guides banks to effect climate transition through social reforms.
- About the Authors
Recommendation
While the transition to net zero is underway, some banks have joined the effort faster than others. Although the majority of bank CEOs recognize the significance of social responsibility measures in their climate change mitigation activities, far fewer implement them, according to this perceptive analysis from professionals at the Boston Consulting Group. They advise executives to include such initiatives in their plans, taking into account their potential impacts and how they affect various socioeconomic groups.
Take-Aways
- Banks must recognize their corporate social responsibility in their net-zero strategies.
- “A just transition” addresses the impacts of climate change mitigation.
- The Glasgow Financial Alliance for Net Zero (GFANZ) guides banks to effect climate transition through social reforms.
Summary
Currently, not many banks incorporate socioeconomic factors into zero-fossil-fuel emissions strategies. Many senior managers fail to consider that adopting socially responsible activities is good business. Regulatory risk will decrease as banks discover government enticements and quasi-public opportunities to support a climate-aware transition. Banks can also attract clients wanting to incorporate social reform into their climate change mitigation efforts.
“The impact of net zero goes beyond climate.”
A recent worldwide survey of financial executives charged with managing environmental, social and governance (ESG) affairs revealed that 90% agree that the social aspects of climate-based bank operations matter. Yet only one-third of the respondents say management choices on climate take into account the social aspects of such options.
“A just transition” addresses the impacts of climate change mitigation.
Actively engaged banks seek to decarbonize their portfolios while improving the well-being of those members of society whom social reform efforts might inadvertently harm. “Adaptation & resilience” (A&R) activities – such as reducing job losses in highly polluting sectors – lower the risk of climate change exacerbating current socioeconomic inequities.
“For banks, like for other companies, negative social outcomes often occur as a secondary effect of making good decisions on climate.”
Green energy will create jobs but eliminate many in high-carbon-emitting firms. Decarbonization will be accessible to some, but not all, because some remedies will prove cost-prohibitive for lower-earning households and small to medium-sized enterprises. Additionally, certain A&R investments could actually further disadvantage groups that are already struggling.
The transition will similarly affect land and community rights. Some communities will benefit from a stronger tax base, and others will suffer from a diminished one. For example, a plant closure could erode a town’s tax base and the availability of social benefits. Processes to fortify Earth systems can cut both ways as well: Afforestation and peatland generation can wall off carbon and increase biodiversity, but they may be harmful if practitioners do not execute their tasks properly. For example, developing a hydropower dam could destroy wildlife.
“In some parts of the world, the potential negative impacts on certain communities have been put forth as a justification for opposing climate measures. However, there are also cases in which putting people and communities at the center of climate policies has resulted in greater and more durable momentum and buy-in for climate action.”
The European Union is taking the lead on ESG reporting through the Corporate Sustainability Reporting Directive and the European Financial Reporting Advisory Group, creating standards for large and publicly listed European firms and for global companies operating within the EU.
GFANZ is one of several programs through which banks can mandate the incorporation of social metrics into their climate change mitigation plans. Banks should align their goals with a green transition. Strategy implementation should include social responsibility objectives and consider their negative and positive effects on climate.
“Banks can play an important part in ensuring climate action is both ambitious and human centered.”
The process will necessarily differ in developed and emerging markets, where transition efforts proceed at different paces. Asset managers’ role will be critical in guiding large enterprises in both the public and private sectors toward socially responsible imperatives.
About the Authors
Douglas Beal et al. are professionals with the Boston Consulting Group.