As big banks struggle to decarbonize, midmarket leaders prove ‘there can be margin in the mission’

The past 12 months have seen a flurry of pledges, goals and “ambitions” from large banks around the world to, in some way, participate in the transition to a net-zero economy. Many leaders emphasize how difficult this work will be. But for other smaller, midmarket players, these sorts of commitments have been a point of differentiation for years.

Amalgamated Bank, which was founded in 1923 and manages $6.6 billion in assets, stopped lending to fossil fuel businesses in 2016. Virginia Community Capital (VCC), a Richmond, Virginia-based community development financial institution (CDFI) with $190 million in assets, building capacity began to lend to commercial solar developments five years ago and specializes in helping installations worth as little as $50,000 get up and going. Dozens of other banks around the world have joined the Global Alliance for Banking Values ​​(GABV), which requires its members to follow strict low-impact and sustainable practices. And some have become B Corps by demonstrating strong social and environmental performance.

Many of these organizations are carbon neutral for Scope 1 and Scope 2 emissions, and have committed to minimize financed emissions (Scope 3) on their balance sheets. Many specialize in climate-focused lending. Many also prioritize transparency and quality in data reporting.

The power of foresight

According to every source reached to report this story, that focus on values ​​and addressing climate risk derives from one single factor: farsighted leadership. “Because environmental sustainability is one of our top priorities as a business, we have always had the executive support required to both pursue environmental sustainability lending and avoid resource extraction lending,” said Jae Easterbrooks, vice and relationship manager for Beneficial State Bank. The bank was founded in California in 2007 with a mandate to drive community development. Since launching, it has expanded its mission to pursue environmentally sustainable practices and, according to the latest available data, manages $1.25 billion in assets.

When the top person says, ‘Let’s do this,’ everyone else says, ‘OK, we’ll figure out how to do it.’

Bill Greenleaf was hired by VCC in 2015 to work in energy efficiency lending. “I quickly discovered that no one in Virginia wanted a loan for energy efficiency,” said Greenleaf, VCC’s senior vice president for real estate lending. “That market didn’t exist.”

But then an opportunity came to finance a small loan for a real estate developer. It was an existing customer, Greenleaf and his team did some initial underwriting, and they deemed the project to be low-risk.

“That was all because our CEO Jane Henderson was interested in it,” Greenleaf said. “When the top person says, ‘Let’s do this,’ everyone else says, ‘OK, we’ll figure out how to do it.'”

Good intentions aren’t enough

Ken LaRoe knows the importance of leadership all too well. He founded First Green Bank in Lake County, Florida, in 2009 with a mission to maximize social and environmental impact. First Green went on to be one of the first North American banks to join GABV. It accumulated nearly $800 million in assets under management. But then investors wanted to cash out.

“We were nine years in, my investors were getting restless,” LaRoe said. “I respect all of them, many of them are friends. The bank that bought us [SeaCoast Bank] said they would continue at least a good bit of our values ​​proposition and keep our people. And they didn’t do either.”

As of publication, First Green Bank still claims to be a member of GABV and a B Corp on its website, although it has lost membership to both organizations. The company declined an opportunity to comment.

“I went through a period of deep depression,” LaRoe said. “I asked myself, ‘Gosh, what just happened?’ In retrospect, I’m glad we sold because I wouldn’t have been able to do Climate First.”

LaRoe establishment Climate First Bank in St. Petersburg, Florida, in June 2021. The financial institution provides lending for a range of sustainable ventures, including building retrofits, electric vehicle charging stations and even carbon offset purchases.

With Climate First, LaRoe has been able to be even more intentional about impact. “[Environmentalism] has got to be in the institution’s DNA,” he said. “And that’s not to say its profitability will suffer. There can be margin in the mission. I certainly hope that we are more profitable than traditional community banks. We were at First Green. It’s the same at every bank. I have investors, and I have a fiduciary duty.”

The company banks keep

One strong indicator of a bank’s DNA can be found in the organizations banks have joined. From a climate impact perspective, GABV sits on the most impactful end of the spectrum. The organization was founded in 2009 and counts 66 global members, including Amalgamated Bank and Beneficial State Bank. None of its members are among the world’s 100 largest banks; they collectively manage just over $200 billion in assets. To join, banks must commit to the organization’s six principles of values-based banking and meet its corresponding criteria.

Many banks also apply to become B Corps, which requires they achieve a minimum score with the organization’s climate impact assessment and risk review. Amalgamated, Beneficial and VCC are each members, while Climate First’s membership is pending.

Assessing impact continues to be a challenge for any banks that have lent to or invested in carbon-emitting businesses. The Partnership for Carbon Accounting Financials (PCAF), which currently counts 287 members (including Amalgamated, Bene and Climate First, along with many of the world’s largest institutions), was launched in 2019 to address this need.

Finally, the Net Zero Banking Alliance (NZBA) formed last year as the banking division of the Glasgow Financial Alliance for Net Zero (GFANZ). Members who join the alliance pledge to align their investment and lending portfolio with “pathways to net zero by 2050,” set intermediary goals and publish absolute emissions every year. One-hundred fourteen banks so far have made this pledge, including Amalgamated, Beneficial, Climate First and many of their larger competitors.

Because of our move toward this type of lending, we are sounder as a bank, we do better with regulators. We’re better lenders overall.

Many banks that have joined the NZBA, however, have yet to reduce their impact. NZBA membership for many organizations has not translated to lessened impact. According to the Banking on Climate Chaos 2022 report compiled by a coalition of organizations, the world’s 60 largest banks have provided $4.6 trillion in financing to fossil fuel ventures since the 2016 Paris Climate Agreement. Forty-four of these banks have taken pledges to achieve net zero emissions by 2050. Many have since increased their financed emissions.

As the report authors write, “While the acknowledgment of banks’ accountability for their climate impact is welcome, as is the setting of their long-term direction of travel, long-term commitments cannot serve as cover for short-term continuation of business as usual; if they do, they are simply greenwashing.”

‘There are a lot of challenges’

Among the world’s largest banks, some have taken meaningful steps forward. Paris-based Banque Postale has distinguished itself by putting a moratorium on all financing that would expand oil and gas production. It has promised to end financing for oil and gas completely by 2030.

Others highlight how difficult their pledged transitions will be. Speaking at the World Economic Forum Annual Meeting in Davos, Switzerland, in May, HSBC Group Chief Sustainability Officer Celine Herweijer discussed her company’s commitment to issue $1 trillion in green financing by 2030. “We’ve got seven and a half years left,” Herweiger said. “And there are challenges with that. There are a lot of challenges because, actually, the green stuff at the moment is quite hard to finance… our bankers and our credit risk teams aren’t used to evaluating [these] newer companies.”

Amalgamated Bank CSO Ivan Frishberg doesn’t buy that argument. “I think it’s completely antiquated,” he said. “Look at the housing market in 2008. Lots of data. Great track record. How did that go?”

Amalgamated Bank began building climate lending and investment capacity in the 2010s. In addition to its pledge not to lend to fossil fuel companies, 32 percent of its loans go to climate-focused or clean energy development. It also offers a range of ESG investment products.

“On our end, our credit quality has increased,” Frishberg continued. “Because of our move toward this type of lending, we are stronger as a bank. We’re better lenders overall.”

Still, Climate First Bank’s LaRoe believes that world’s largest banks have an important role to play.

“I don’t want to vilify big banks,” LaRoe said. “There has to be a transition and, if they are serious about transitioning, they will be helpful in the long run. You have to look at the person at the top. I’m not sure, but I don’t think [JPMorgan Chase CEO] Jamie Dimon is a bad guy. I think his heart is in the right place. They’ll probably turn out to be leaders among big banks.”

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