By Shelburne, Vermont Financial Advisor Josh Kruk
October 1, 2021
Recently, I was leafing through Citigroup’s 2020 Environmental, Social and Governance Report (1). Banks like Citi have become much more public about how they plan to both contribute to and benefit from societal change.
The report is 176 pages long, which underscores both the focus and resources that Citigroup is committing to ESG and the ability of large financial firms to turn any topic into a tome rivaling War and Peace. Because our investing strategy focuses on the environment, I spent more time in the sections devoted to climate change. Significant space was used to describe how Citi plans to change its financing mix.
As an example, exposure to companies that derive at least 25% of their revenue from thermal coal mining will be reduced to zero by the end of 2030. On one hand, this seems pretty tepid and certainly isn’t game-changing. On the other, it’s probably just a start and it’s better than what would have existed a few years ago (i.e., nothing).
There are not many businesses that inspire more cynicism than big banks. We occasionally wrestle with whether owning their stocks is aligned with our environmental mandate when they still finance fossil fuel businesses. One reason we own them is that relative to other industries, banks have very low direct carbon footprints. Banks are also a more palatable way to replace the dividend income we forego by not owning traditional energy and utility companies.
But another reason is exemplified in Citigroup’s report. Providing less coal financing is the sustainable choice, but it’s also just common sense. The chances of that being a profitable loan long-term are lower than they used to be. Like any rational for-profit business, banks will follow incentives. The harder society pushes to reduce the incentive to lend to fossil fuel businesses, the less capital banks will provide.
Conversely, as the incentive to fund green businesses increases, so will the financing. And this in fact is already happening. According to Bloomberg, so far in 2021, banks have earned more than twice the fees for underwriting sustainable debt than for underwriting fossil fuel debt. (2)
That last part is critical because there is a massive need for private sector green financing, and banks will be a necessary conduit. Maybe in an ideal world, they would be doing this strictly out of the goodness of their hearts, but as long as it’s happening, I say we roll with it.
1. https://www.citigroup.com/citi/about/esg/downloads.html
2. https://www.bloomberg.com/news/articles/2021-09-29/banks-are-really-cashing-in-on-esg-bond-underwriting-green-insight?srnd=green-finance