Banks and Climate Financing: A Case Study from Lithuania
Climate change is speeding up rapidly, and becoming more and more challenging to adapt to or mitigate. The financial sector can facilitate the mitigation or adaptation processes. However, banks worldwide are not necessarily willing to cooperate.
In this guest blog Kęstutis Kupšys, Vice-President of the Lithuanian Consumers Alliance, presents the background and work thus far on Fair Finance Guide policy assessments of banks in Lithuania.
The sixth report of the Intergovernmental Panel on Climate Change (IPCC) Working Group, published in 2021 indicated that we will likely miss the target of preventing the planet from increasing in temperature by more than 1.5 °C in the coming two decades. Under a high-emissions scenario, the IPCC found that the world may warm by 4.4 °C by 2100. The results of this global warming are catastrophic: an increasing number of extreme climate events (floods or fires), the loss of biodiversity, danger to human health, and the loss of natural resources, such as food. According to the IPCC, managing to keep the temperature increase to 1.5 °C is still possible, but only if extreme measures, such as the following, are put in place as soon as possible:
- Transforming energy and transportation systems that are the main emitters of greenhouse gases (GHG)
- Reducing the impact on biodiversity
- Developing sustainable agricultural models to reduce pollution
- Focusing on green innovation.
As with all kinds of projects, transforming the most polluting industries requires funding. Banks have a unique role in this context, both complementing and catalyzing private sector players. Banks have a privileged position in their local markets, strong knowledge of the private sector and a long-standing relationship with it, a good understanding of local barriers to investments and opportunities, and vast experience in long-term investment financing. Banks' most significant contribution to GHG emissions are indirect, through client funding and in projects that generate GHG emissions. Banks do, however also still continue to play the crucial role of major financiers for the coal, oil, and gas industry, effectively delaying the much-needed transition from fossil fuel-based economies to efficient, renewable-energy-based economies.
NGO networks, such as Fair Finance International, criticize financial institutions for their lax approach to global problems, focusing only on profit and ignoring other factors. Fair Finance International comprises coalitions of civil society organizations in Belgium, Brazil, Cambodia, France, Germany, India, Indonesia, Japan, the Netherlands, Norway, Sweden, The Philipines, Thailand and Vietnam. A comprehensive study based on the Fair Finance International Guide was published in Lithuania as well. The study was implemented by the Lithuanian Consumer Alliance and aimed to encourage banks operating in Lithuania to conduct more sustainable financial operations and reduce the financial sector's negative impact on the environment and society. The Consumer Alliance has also taken the initiative to encourage banks and other financial sector institutions to restructure their operations according to different standards that promote a more comprehensive range of activities that are not just for profit.
Building upon the methodology of Fair Finance International, the Lithuanian study examined publicly available information on sustainability-related activities of six banks operating in Lithuania. The aim was to investigate which banks operating in Lithuania engage most with environmental, social and governance (ESG) principles, and to inform consumers of the findings. The research revealed that the two most active banks in this field are SEB Bank and Swedbank. Nevertheless, all banks operating in Lithuania should improve their policies related to environmental protection and public welfare in Lithuania. Some banks have indicated that they publish information related to the topics in the bank's internal documents. However, this information was not assessed because the study's primary purpose was to evaluate publicly available information that is easily accessible to consumers. The banks with the highest scores have international roots, and those with the lowest scores are, in general, local and smaller banks (Pic. 1).
Based on the results of the study, the Lithuanian Consumers Alliance recommends that banks:
- Ensure that environmental, social, and governance factors (ESG) are implemented and monitored in all lending and investing activities.
- Specify in which banking activity sectors (for example, lending to specific economic activities) the publicly available operational bank policies are applied.
- Provide clear, comprehensible public information on applicable sustainability policies to its customers and all concerning stakeholders.
Finally, the financial sector can help make a significant difference by financing more sustainable and environmentally-responsible projects. The environmental sustainability of investments does, however need to be implemented on a large scale. This Lithuanian study on bank policies illustrates a first push for banks to implement more sustainable financing. However, more regulation and greater societal pressure is needed in order to change the situation globally.
The Lithuanian bank assessment project, S.U.R.F. in short (SUstainability in Retail Finance), is funded by BEUC, the European Consumers Organization, as part of the EC‘s Capacity Building Project. Before the project finishes at the end of 2021, researchers from the Lithuanian Consumers Alliance will continue bank assessments in four additional areas (animal welfare, corruption, health, and taxation). Another round of assessment reports are expected to be published at the end of 2021.