I take a wide-ranging holistic view of sustainable wealth planning. This means I consider every detail of your circumstances and how it fits together to create the best overall solution for you. This is particularly important when thinking about how to utilise your wealth in line with your values.
Together, we can direct investment towards companies that create positive environmental or social impact. We can also avoid those that do harm or don’t manage environmental and social risks well. We can work with investment managers who use their role as investors to encourage companies to improve their practices. This helps ensure your pension and investment funds are doing their bit for people and planet, as well as building your personal prosperity.
However, there is another very obvious piece of your financial jigsaw that should not be overlooked when considering sustainability – the role of the money you hold with Banks. There are various ways in which you will interact with banks, whether as a business owner or an individual. Clearly, you will have a current account and perhaps savings accounts too, a mortgage or other loans. You may have already thought about or made the move into a “green” or ethical banking option, to ensure your cash holdings are invested in line with your values.
Perhaps less obviously, it’s likely you will have some exposure to banks in your investment funds, either via holding bank shares directly or lending money to them via a Corporate Bond fund (like a mortgage in reverse). Banks borrow money via Corporate Bonds, in return for which the bond holder (you and the fund) receives typically a fixed interest rate for a fixed period. Corporate Bonds are popular holdings in bond funds (sometimes also known as fixed interest funds), as it tends to be a relatively secure source of income. Bank debt therefore features in both sustainable and non-sustainable investment funds.
The financial crisis of 2008 illustrated the huge role the banking system plays in the global economy and there were ripples of concern when a couple of banks ran into difficulty more recently (Silicon Valley Bank and Credit Suisse). If you have been investing surplus cash for a while, you might also remember the last time interest rates were relatively high and how the Icelandic banks paying the top rates ran into serious difficulty. It was a time that made us all take the investor compensation limits very seriously. (£85,000 per person per bank licence)
The recent issues at Silicon Valley Bank were very different to the problems which emerged in 2008. Problems arose from new circumstances that didn’t apply to the banks that were hit in the financial crisis – such as the risk of depositor panic spreading via social media or having a very niche customer base of tech entrepreneurs. One risk that applies to all banks potentially, and which may or may not be managed well, is the risk of investing in the oil, gas, and coal industries.
Scientific reports have repeatedly confirmed we cannot maintain a healthy global climate or meet UK Net Zero emissions without stopping the extraction of further fossil fuels. Nevertheless, only a handful of banks restrict direct financing of oil and gas projects and even fewer restrict wider lending to the companies that are expanding oil and gas capacity. This means that a large proportion of banks are exposed to “stranded asset” risk. If government policy should dictate that no further extraction is permitted, if demand reduces or if extraction becomes too costly, then some fossil fuels will be left in the ground. This would effectively leave the banks in a position similar to a mortgage lender, with loans secured on properties that are likely to become uninhabitable and have no value in future.
Many campaign groups have been petitioning banks to move away from fossil fuel funding for a number of years, but we are also seeing some serious efforts from fund managers to persuade Bank Executives that the future is green.
A group of leading global investors who are part of the Institutional Investors Group on Climate Change (IIGCC), have called on banking firms to set enhanced net zero targets for 2050 or sooner, include interim targets, scale up green finance and withdraw from projects that fail to meet United Nations Paris Agreement goals. In the years since the 2015 Paris Agreement, the world’s biggest 60 banks have provided $3.8tn of financing for fossil fuel companies. These big investors are urging banks to cease activities that cause emissions through deforestation and land-use change, as well as from fossil fuel financing. Banks must not rely on unproven negative emissions technologies, and avoided emissions arising from green finance should not be used as offsets.
A member of the IGCC group and employee at the fund manager Sarasin & Partners said:
“Banks provide the lifeblood to economic activity. Through lending, investment banking and advisory activities, banks play a central role in where capital is allocated. The problem we face today is that too many banks are failing to consider climate harm when they make financing decisions, and too much money is being ploughed into carbon-intensive activities that we so desperately need to move away from.”
I believe that stoking the engine of investor engagement with banks is important; it adds a valuable voice to those in science, academia and campaigning who are also calling for the banks to invest sustainably. The not-for-profit organisation ShareAction did after all have some success last year, leading on a shareholder resolution that asked HSBC to tighten up its policy on lending to oil and gas companies. ShareAction’s efforts contributed to HSBC committing to not finance new oil and gas fields and new metallurgical coal mines.
When it comes to tackling climate change and other environmental and social issues associated with fossil fuel extraction, there is always a need to move faster and cover more ground. We therefore encourage you to consider switching personal or business bank accounts to greener, cleaner options.
*If investing in stock markets and corporate debt, please note that capital is at risk and these investments are designed for the long term.
ShareAction | Oil & gas expansion A lose-lose bet for banks and their…
Leading investors representing $11 trillion call on banks to set enhanced net zero targets – IIGCC
ShareAction | HSBC announces it will no longer finance new oil and…
Photo by Etienne Martin on Unsplash
