Banks that take a leadership position in the carbon transition could see their profits grow by up to 30 per cent, a new study by Bain & Company has found.
For this profit boost to occur, the firm said that banks would need to prioritise the granular measurement of emissions associated with their lending and investment activity.
These financed emissions, Bain & Company said, represent at least 95 per cent of the overall carbon footprint of banks globally.
“Many banks have the opportunity to build a more accurate baseline of emissions in their lending and other financed portfolios as there is a risk of over or underestimating financed emissions by up to double when using loan data that is not granular enough,” the firm said.
“This critical but complex task of measuring financed emissions makes it challenging to understand where and when value will emerge in the carbon transition and which strategy is best for a bank to capitalise on it.”
Bain & Company suggested that banks which adopt a strong climate transition commitment and directly address these challenges would see their profits grow by between 25 and 30 per cent by 2050.
Meanwhile, laggards that adopt a passive approach mainly tied to regulatory requirements are expected to see their profits eroded by between 10 and 20 per cent over the same period.
“Banks have a pivotal role to play in limiting global warming to 1.5 degrees Celsius, and industry-wide initiatives, such as the Glasgow Financial Alliance for Net Zero, are critical,” commented Bain & Company's global lead for sustainability and responsibility in financial services Camille Goossens.
“We see positive momentum on both commitments by 2050 and 2030 as well as on disclosures that are increasingly transparent and precise. However, this critical topic requires banks to invest in reliable granular data and to increasingly adopt longer-term adaptable strategic thinking.”
By investing in high-calibre emissions tracking, Bain & Company said that ‘pioneer banks’ would be able to make smarter strategic decisions and support their clients to transition.
While laggard banks are only expected to shift between 40 to 50 per cent of their portfolio to green assets by 2050, the firm estimated that pioneers would shift as much as 85 per cent.
“In turn, their cost of funding and risk will be far lower than those of slower-moving competitors, who will be increasingly penalised by markets and investors for higher exposure to traditional industries and projects,” Bain & Company said.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
