NatWest has promised to stop working with any oil and gas company that doesn’t have a “credible” plan to go green.
Chief executive Alison Rose has made tackling climate change one of her key priorities since taking over NatWest at the end of 2019.
She has called it “one of the defining challenges of our lifetime” and said NatWest has “a clear obligation” to help.
NatWest had made a series of green pledges including a promise to cut the carbon footprint of the bank’s financing activities in half by 2030.
The bank has set out detailed plans for how it plans to do so in several sectors and work is ongoing for other industries.
Reaching net zero by 2050 will require global investment of around $1.6tn (£1tn) each year for the next three decades, according to a recent report Energy Transition Commission. It represents a huge opportunity for banks that can figure out how to take advantage of it.
NatWest’s green shift is part of a broader reckoning going on across finance. Banks and investors have come to realise that lending to, and investing in, fossil fuels is a key component of the climate issue.
At the same time, they see big money in a green future. Investment in “ESG” funds — environmental, social, and governance — has grown tenfold since 2017 and reached $1.6tn last year, according to Societe Generale.
Part of the urgency comes from heightened awareness of the problem. Wild fires in Australia and California, snow storms in Texas, and a record-breaking Atlantic hurricane seasons last year have all highlighted the issue of climate change.
Johan Frijns, a director at BankTrack, a non-profit that monitors the social and environmental impact of the banking sector, said NatWest’s public climate commitments “stand out” within the industry.
In November, NatWest was announced as the banking sponsor of the 26th UN Climate Change Conference — known as COP26 — which takes place in Glasgow later this year. The partnership puts NatWest’s climate agenda firmly in the global eye-line and raises the stakes when it comes to following through on promises.
Turning NatWest green is a complicated task that involves both cutting back “dirty” industries and investing more in clean alternatives — a carrot and stick approach.
Part of the challenge is figuring out how to finance the transition to a green economy. Lenders must price “true” climate risk into loans, allowing green investments to access cheaper capital than dirtier ones.
Pricing can prove challenging given that green investments often lack the track record that fossil fuels do.
A lack of predictability can make the cost of capital for early stage clean industries unattractively high. Close said banks needed to learn lessons from the growth of solar power and other renewable energies.
NatWest recently announced a partnership Octopus Energy that will give the bank’s customers access to discounted electric vehicle charging stations.
It has partnered with Microsoft to develop software for NatWest’s business customers to measure and reduce their carbon footprint.
BankTrack’s Frijns said NatWest was on the right path but needed to provide more details. For example, how will NatWest determine what counts as a “credible” climate plan for an oil and gas company?
“They came a long way,” he said. “They considered themselves essential for the oil and gas industry, and what we see now is they are positioning themselves very differently. Our impression is that it’s a genuine effort to do things differently that now needs to deliver.
“We get cynical in this business. You do it for a long time, you see a lot of promises. We want a bank to be sincere and we haven’t given up on NatWest yet.”
2021 is likely to be a pivotal year. COP26 takes place in November and banks across the UK will face the Bank of England’s first ever climate “stress tests” later this year. Lenders could be forced to set aside billions extra in “risk weighted assets”, Bank of America analysts warned in a recent note.
This could be the catalyst banking needs. Stress testing “dirty” assets will inevitably make them more expensive to hold, which could help drive capital to greener investments.
Action is needed fast — campaigners warn that we are already dangerously close to climate tipping points that could do irreversible damage.