DEVELOPMENT OF SUSTAINABILITY IN THE BANKING SECTOR: BETWEEN SETBACKS AND CHALLENGES
Recent developments in the area of sustainability at financial institutions are characterized by contradictory trends. While European banks continue their efforts to reduce CO2 emissions, for example by supporting the "European Green Deal" initiative, recent political developments in the US have led to a shift in priorities. The new US administration has announced a stronger focus on fossil fuels, which is already reflected in the decisions of major American banks. The major American banks have withdrawn from the Net-Zero Banking Alliance (NZBA). These developments raise questions about how the global financial sector will position itself on sustainability in the future. So far, the withdrawals have been concentrated in America. What role will European banks play in the future? Will initiatives such as UNEP FI's "Principles for Responsible Banking" have sufficient impact? In this article, we examine the current situation and its impact on the banking sector.
Withdrawal of the US banks from the NZBA:
The withdrawal of US banks from the Net-Zero Banking Alliance (NZBA) marks a significant turning point in the global sustainability movement. The major banks that have left include Goldman Sachs, Wells Fargo, Citigroup, Bank of America, Morgan Stanley and JPMorgan Chase. The reasons for this step are manifold: the new US government's skeptical attitude towards climate targets is a major factor. There are also legal concerns, as membership of the NZBA could potentially violate antitrust law if it leads to financing restrictions for companies in the fossil fuel industry. Some banks also emphasize that they want to pursue their climate goals independently, without being tied to the NZBA.
The exit of these banks will have a significant impact on the global financial landscape. Before the exit of the US banks, NZBA institutions accounted for over 40% of global banking assets. After the exit, this share has fallen to around 35%. This decline underscores the significant influence that large US banks have on the global financial landscape and highlights the challenges facing climate initiatives in the banking sector. It is important to note that this trend began before the new US administration took office, indicating anticipatory obedience to expected policy changes.
Reactions of European banks:
European banks are showing a mixed reaction to the withdrawal of their US counterparts from the NZBA. While some institutions are also considering withdrawing, large German banks, in particular Deutsche Bank and Commerzbank, have decided to remain in the alliance for the time being. Nevertheless, these institutions are also monitoring the situation very closely. Commerzbank reaffirmed its commitment to climate neutrality by 2050 and sees "currently no reason" to leave. Deutsche Bank is also sticking to its sustainability targets, but emphasizes that it is monitoring the political, regulatory and legal environment very closely. However, it is important to emphasize that there are different speeds and priorities in the sustainability strategy within Europe. Swedish pension funds, for example, started to remove fossil fuels from their portfolios at an early stage. Some Scandinavian banks, such as Nordea and Danske Bank, are considered pioneers in this area and have set themselves ambitious targets for green loans and sustainable investments. There are concerns that the withdrawal of the US banks could lead to an overall weakening of climate targets in the European banking sector.
Challenges in the area of sustainable finance:
Despite the commitment of many financial institutions to sustainability, there are still considerable challenges in the area of sustainable finance. A key problem is the failure of many banks to set net zero targets. In addition, there are difficulties in effectively integrating ESG criteria (environmental, social and governance) into business and risk models. For example, social standards in supply chains are often insufficiently taken into account or coal-fired power plants continue to be financed without adequate risk assessment. The inadequate consideration of climate risks, particularly with regard to companies that are active in fossil energy generation, represents a further challenge. Last but not least, there is often a lack of clear guidelines and sufficient transparency regarding the environmental and social impact of financial products and services. In addition, the complex requirements of the EU Taxonomy Regulation pose a challenge, as it requires a precise classification of sustainable activities, which means a significant change for many banks. However, there are also positive examples, such as GLS Bank, which finances projects in the areas of renewable energy, organic farming and sustainable housing. These factors hinder the effective implementation of sustainable finance strategies and underline the need for financial institutions to step up their efforts in this area.
Outlook and conclusion:
The headwind that the ESG movement is currently facing illustrates how crucial it is for banks to position themselves clearly in the area of sustainability. It shows who is really working for sustainable finance out of strategic conviction and who is bowing to short-term political or economic trends. In order to live up to their responsibility, banks must now take concrete business policy steps to support climate protection - for example by developing new sustainable financial products, strengthening the ESG expertise of their employees or transparently communicating their sustainability performance. In concrete terms, banks could, for example, launch special programs for building renovations or increase the promotion of sustainable technologies. A proactive sustainability strategy is not only a question of social responsibility, but also offers banks considerable opportunities to position themselves as pioneers and achieve long-term competitive advantages. By adapting to sustainable standards at an early stage, banks can also minimize risks and benefit from the growing markets for green financial products. Developments in the US could also have an impact on Germany and Europe, particularly in terms of competitiveness and capital flows. It is therefore all the more important that European banks continue and expand their sustainability efforts.
CURENTIS AG position:
CURENTIS AG is convinced that recent developments in the global financial sector underline the need for European financial institutions to continue and strengthen their sustainability efforts. Despite the headwinds facing the ESG movement in some regions, banks should seize the opportunities offered by a proactive sustainability strategy. CURENTIS AG supports financial institutions in the development and implementation of sustainable strategies. This includes the regulatory implementation of CSRD reporting and the Taxonomy Regulation to ensure that they not only comply with current requirements, but also play a pioneering role in sustainable finance in the long term.
To the author:
Philipp Ehren has been a Senior Consultant at CURENTIS AG since 2021. He is our specialist for sustainable finance and has several years of experience in project work in risk management with a focus on IT applications. He is also a qualified project manager.
