Every day in the run-up to Christmas, Good With Money is featuring one expert, talking about how to meet one of the UN Global Goals. James Vaccaro, International Corporate Strategy Director at Triodos Bank, discusses some of the ways in which banking can help meet some of the Global Goals – Climate Action in particular.
The interview below first appeared in Triodos Bank’s magazine, The Colour of Money.
Continuing to do what we’ve always done is not enough. Banks are indispensable in tackling climate change and other major issues in society. However, this has not yet been sufficiently understood.
James Vaccaro, Triodos Bank
Why are banks and other financial institutions so important in tackling climate change?
“Banks do not exist simply for themselves. They fulfil a number of important functions in society. One of these is the financing of entrepreneurs and organisations committed to tackling major social and ecological issues. The broad responsibility of banks is also the principle underlying our recent ‘New Pathways’ report on how we can achieve a stable and resilient financial sector.
Tackling climate change is the biggest issue facing us. This will require a huge amount of money and financial expertise. Banks are well positioned to provide for this.”
Don’t they already do that?
“One sometimes gets the impression that many banks and other financial institutions have forgotten their role in society in recent decades. It seems that they have, as it were, withdrawn from society and the real economy, and are living on another planet where their own financial interests, and those of their shareholders, predominate.”
Now, 10 years following the start of the banking crisis, has anything really changed?
“It is disappointing. There has been no real significant change in the financial sector since the crisis. And that is quite sobering to see. In recent years, in response to the crisis, we have come up with a thousand and one new rules that banks must comply with. Supervision of the sector has also become much stricter. This is all with the aim of making the sector more stable. However, rules and supervision are not substantial changes. They mainly offer a false sense of security while banks continue to disregard their original role: that of financing developments that are important for society.”
Why do rules only offer a false sense of security?
“A bank lends money to businesses and projects. There is always a certain degree of risk attached to this lending, since a business can get into trouble and possibly not repay the loan. To be able to cover this risk, banks hold a certain amount of buffer capital. As a result of the banking crisis, governments and regulators have increased capital requirements for banks. Banks must, therefore, keep a larger buffer on hand. Which is fine, of course. The problem is that regulators do not distinguish between loans to sustainable and non-sustainable businesses and sectors, and as result we still have an unstable financial sector.”
Why is that?
“Let’s look, for example, at a loan to a company in the oil industry. Renewable energy sources will increasingly replace fossil fuels in the future. This will create a major problem, in the tens of billions of euros, for banks that are involved in the oil industry. They will have money outstanding in an industry that is coming to an end and, therefore, becoming less and less lucrative. The risk of these banks not seeing their money back is greater than if the money had been invested in a future-proof sector, such as sustainable energy.
Regulators should ask banks for larger financial buffers when they have outstanding
loans in sectors that are not part of the future.
Financial Sector regulators should therefore take a broader and deeper view when assessing a bank. It is important that they take into account the social and environmental effects of the actions of the businesses to which the banks lend money. For example, regulators should ask banks for larger financial buffers when they have outstanding loans in sectors that are not part of the future. Until that happens, the stability of banks is not sufficiently guaranteed.”
The supervision of banks must therefore be different. What can banks do differently?
“At the heart of the approach is a long-term perspective and an analysis of what society really needs. This means that banks should use their knowledge and creativity to promote sustainable development. They need to leave their ivory towers and connect more closely with society. This means determining what is needed, and what role the bank can play, in close cooperation with others – entrepreneurs, organisations in the public sphere, governments and citizens. There are plenty of opportunities for banks to harness their innovative power. The energy neutralisation of residential homes in the Netherlands is just one example. As lenders, banks are indispensable in this respect. They can develop new ways of financing to encourage households to become more sustainable. One way this could be done, for example, is by linking the amount of mortgage interest to the energy performance of the house. The interest paid by a homeowner will then be lower if their home is more energy efficient. This could encourage households to invest in solar panels and house insulation, for example. And such a new type of mortgage can contribute to the realisation of an ecological goal: reducing CO2 emissions from households.”
Triodos Bank already uses money to stimulate positive change. More of the same, then?
“Certainly, but that is not enough. We must challenge ourselves. The challenges of the future are simply too great to continue to do what we have always done. It is also time for sustainable banks to take new steps so that we can accelerate change.”
What new steps are involved?
“Think, for example, of setting up new partnerships with companies and civil society organisations to solve today’s really difficult issues, such as realising the SDGs – the United Nations’ Sustainable Development Goals. One of the objectives is to restore ecosystems and soil fertility, and to combat desertification. This is important, if only because our food supply depends on the availability of sufficient fertile soil.
However, the restoration of soils and ecosystems is a slow process that will only bear fruit after many years. It is important that banks use their innovative strength to develop new forms of financing suitable for long-term and slow recovery projects. Thus, forms of financing that only generate financial returns in the long term.
An organisation such as Commonland based in Amsterdam is committed to the restoration of ecosystems worldwide and involves many different parties, including banks. By restoring ecosystems and soils an area becomes suitable again for farmers and other businesses. SEKEM projects in Egypt are also based on this principle. Banks can develop forms of financing suitable for these types of project and organisation, and, only if they do so will they really contribute to solving the issues of today and tomorrow.”
Change finance to finance change: that is the core.
Does taking new steps mean that Triodos Bank has to completely change direction?
“No, certainly not. As a bank, we have been focusing on financing positive change for almost 40 years. And we’ll continue to do this. However, developing new forms of financing is becoming increasingly important. Only then will we be able to face the great challenges of the future. Change finance to finance change: that is the core.”