This is not a time to waver
Prof. Bhattacharya, H.J. Zoffer Chair in Sustainability and Ethics at the Katz Graduate School of Business, University of Pittsburgh: „There is huge scope for expert advice and client services from banks“
Professor Bhattacharya, climate change also means: banks face new credit, market, and operational risks. As an expert in sustainability and ethics, what do you recommend as options for banks to deal with them?
CB Bhattacharya: Banks have to acknowledge that climate change is real and that something big is happening. Many organizations still operate in denial of what is happening to our planet – they can talk the talk, but not walk the walk. A bank can only begin to change when it really grasps that a fundamental shift in finance and banking is underway. The next step for every bank is to rebalance its portfolio. How much capital is tied up in stranded assets in industries based on burning fossil fuels or resource extraction? Where should these funds then go?
You’ve looked at many sectors in all parts of the world. Which industries face the biggest risks? And which corporate banking clients therefore have to make the biggest changes?
The sectors that face the biggest risks are the ones that use old, non-human energy forms to power themselves: oil and gas, heavy manufacturing, and then the car industry after that. As a rule of thumb, you can fairly safely assume that the bigger an industry’s carbon footprint, the bigger the attendant risks for its companies and suppliers.
In your book "Small Actions, Big Difference" you note that too few companies are doing enough to deal with climate change. From which industries could banks usefully learn a thing or two?
One of the main points of the book is that we can’t yet identify one whole industry that is doing enough – except, of course, for the renewable energy sector. My advice is not to focus on any particular sector, but to look at companies that have made solid attempts. I looked at Enel, an Italian power company, that is phasing out all its fossil fuel power-plants; IBM is a best practice example for supply chain changes to ensure raw materials are sourced responsibly; and Unilever has reworked its entire value chain to operate more sustainably.
Politics currently appears to be having a tough time dealing with climate change. How far are politicians and governments hindering companies respectively banks?
Every company – banks included – is very much hindered by the fact that politics is having such trouble in seriously grappling with the problem. But that means citizens are increasingly looking to companies to pick up the baton. Companies can talk to their customers, listen to NGOs, persuade their suppliers to change course or else. Yes, companies are also having a tough time. But that doesn’t mean we should stop spurring them on. The fact that governments are suffering from inertia doesn’t give business the excuse to do nothing.
Clients under pressure are risky clients. But could they also be clients that need new or additional services – and capital? Do we have to rethink risk and opportunity?
Every company that recognizes that it’s a new world out there will want expertise and new vision, outside leadership and advice. If you stop focusing on the risks and look at the opportunities, there is huge scope for expert advice and client services from banks. Next to providing invaluable insight, banks will also have to provide these clients with capital. As long as the plan that needs funding is sound, it is their duty. Banks have a real responsibility.
To reach carbon neutrality by 2050, the European Union is estimated to need funds of EUR 175–290 billion every year. Are the opportunities for banks really bigger than the risks?
Yes. A couple of years ago, the green economy was already worth as much as the fossil fuel sector – clean energy and other green businesses were worth USD 4 trillion. So you see how quickly we can go from billions to trillions. Qualitatively, I’d say that opportunities do outstrip risks. Banks should fully engage in funding if risk assessments allow it. This will create jobs and growth – and more enthusiasm for tackling problems. This is not a time to waver.
You have worked as a professor of business in the US and Europe. Are businesses in these regions confronting climate change differently – and what can banks learn from this?
The short answer: Europe is ahead of the US. People in Europe have a stronger sense of ownership when it comes to the planet, so it’s easier for European companies to move forward. US consumers do not yet see the writing on the wall. They do not get that they will have to rein in their consumerist habits and their country’s carbon footprint. One could argue this is good for Europe’s banks. But European companies have made progress for some years and cleared much low-hanging fruit. The next steps are going to be tougher.