You may have seen “COP26” floating around the news world in recent weeks. Hosted in Glasgow this time around, COP is an annual United Nations “Conference of the Parties” aimed to unite the world in tackling climate change.
Although the conference has convened 25 other times to date, the term “net-zero” is just now coming into sharp focus. In fact, right before the conference started, the UK government published its detailed net-zero 2050 strategy. But that’s not all: Chancellor Rishi Sunak also announced during the conference that “the UK will be the world’s first net-zero financial centre”. To get there, UK financial institutions will be required to publish their net-zero transition plans to a designated task force by 2023.
Here’s everything you need to know about how your bank’s net-zero efforts may affect you.
What does a net-zero bank look like?
First, let’s cover what net-zero is and what it means for a financial institution to become it.
An organisation is “net-zero” if their total greenhouse gas (GHG) emissions are equal to or less than what they remove from the environment. To do this, a business would have to first calculate their emissions, and decrease them as much as possible. Then, whatever remains, they must invest in GHG capture and removal technologies to come down to net-zero. That, or get down and dirty to plant some trees that store the carbon naturally!
Sounds simple enough, right? Not quite.
For all types of businesses, but for financial institutions especially, measuring GHG emissions in the first place can be extremely tricky. This is mainly because the calculation must not only include their direct and indirect emissions, such as the carbon released from their cars and the emissions associated with the electricity they purchase but also the emissions up and down their value chain. For your bank, this means that any emissions related to their loans and investments must be accounted for.
The resulting spreadsheets are not for the faint of heart…
How would your bank going net-zero affect you?
Under the new proposed rules, your bank may already be making plans to become net-zero. Luckily, this will not affect your day-to-day matters directly, and your deposits continue to be safe up to £85,000 under the Financial Services Compensation Scheme.
Past chequing/savings accounts and credit cards, however, things may start to look a bit more different over time. Depending on the specific plans your bank adopts, rates and conditions of their existing loan and investment products may change.
With the transition, your bank’s bottom line would no longer be to just make more money. It would also be to take care of the environment.
Keep in mind that financial institutions going net-zero is still unchartered territory, and real-life examples don’t quite exist yet. However, here are some predicted changes that may come your way in the next decade.
Loans and mortgages
If your bank is making efforts to become net-zero, any vehicle loans, residential mortgages and general-purpose loans may come with clauses and/or incentives for you to decrease the emissions related to your newly acquired funds. This would require complex accounting methodology on your bank’s end, as well as new products, incentives and/or requirements for their customers to keep their emissions low.
For instance, banks may incentivise buying electric vehicles by having attractive ‘electric vehicle’-only loan products. Or they may no longer finance homes that are energy-inefficient without solid retrofit plans in place and even offer you retrofit financing options to complement those plans. You may also have to disclose how exactly you plan to use your loan and the emissions you predict to emit.
New investments
Any new investments you make through your bank would be placed in fully ESG-backed portfolios, and your money would not be invested into any oil or gas stocks going forward. Such portfolios may have different returns on your investment at first. However, the more the economy turns towards responsible investing, the quicker your returns will stabilise.
Existing investments
With time, it may also be necessary for your existing investments to be transferred to more ESG backed portfolios, although the fees associated with this change will likely be taken on by your bank. However, if you continue to have funds invested in fossil fuels in the next decade, it is quite possible that your portfolio might take a hit as more banks shift towards responsible investing as part of their net-zero strategies. It may be a good idea to get ahead of this curve by adopting an ESG investing approach now.
