Amid lots of talk about everything big corporations and their financial partners are doing (or not doing) to confront climate change challenges, it’s important to dissect and explore the facts and fables involved. One way to do this is by comparing bank and corporate marketing claims against their actual environmental and social accomplishments - or failures to execute or make meaningful progress against the latter, in some cases.  

To really understand all the angles of sustainability and sustainable finance, or increasingly what’s being more accurately referred to as the drive for more regenerative business practices, (involving circular, renewable operations and supplier and customer relationships), it’s also critical to expand the scope of examination beyond the big firms and multinationals.

Industry experts on all sides agree that we’re overdue for a closer, more careful look at the opportunities and potential impacts of new environmentally-sound practices, looming operational requirements, and regulatory mandates on smaller and medium sized businesses/enterprises (SMEs), their employees, supply chain partners, and local communities.

Ahead of Finextra’s upcoming Sustainable Finance Live event, we sat down with leaders of a key Ceres program, to tackle these topics and hear from this influential force in corporate sustainability.  

US banks both lead and lag in climate change transition

In a previous article, we shared portions of the interview with Ceres’ Dan Saccardi and Blair Bateson, in which we examined the present state of sustainable financing in the US.

Given that many US banks or foreign financial institutions with significant American operations are in the top 50 of their industry worldwide, according to S&P Global, Ceres comments on the industry’s progress have relevance far beyond US borders.

The questions we asked the Ceres leaders explored sustainability promises vs. actual performance to date. There should be a match between the two factors,  now several years into top banks’ Net Zero commitments and promised timelines for action.

Yet, as we confirmed in the article, there’s still a disconnect. Top financial institutions have had a hard time aligning their marketing claims with their actions in the corporate marketplace, sending mixed messages (i.e., by continued funding of controversial projects in areas such as fossil fuel exploration) to environmentally-harmful industry clients. Most of these banks’ programs and outreach have scarcely scratched the surface of the SME customer base – which according to The World Bank, comprises about 50% of all jobs across the globe.

Why SMEs have joined giants on business action for climate change

According to leading observers in the investment and policy-advocacy sectors, the urgent need is for banks and their customers - especially those with the  largest carbon footprint - to implement meaningful climate transition plans that mesh their actions taken with promises made in their sustainability marketing claims. Not enough tangible progress has yet been made, and much more is needed to achieve the almost universally-agreed United Nations climate and temperature targets before the end of the 21st century.

Think of it as a track meet’s third-to-last event, and your team needs a solid performance to line itself up to win each remaining race and stand on the victor’s podium together at the end of the day.

• You’re behind the rest, and though there’s still time, it’s quickly running out, and ‘false starts’ – in this case, of many financial institutions on the sustainability/regeneration promotion line - are causing increasingly upsetting delays in the meet (climate change challenge).

• These erratic actions are beginning to elicit angry rebukes from investors, regulators, and consumers-the spectators in the stands.

• If it was the 4 x 1000-meter relay, any more false-starts out of the blocks or dropped batons along the way by banks’ teams might result in their disqualification from consideration – as trusted customer suppliers, reliable investment candidates, or from receiving any positive reputational benefits via their claims to be truly supportive of climate change and greenhouse gas (GHG) emissions reduction efforts.

Why banks should be incentivised for sustainability efforts

As advocates and policy advisers to both business and government, organisations like Ceres, the Sierra Club, and the Environmental Defence Fund, among others, would surely rather be having friendly conversations and executing mutually-agreed strategies and roadmaps with banks, corporations, and other critically important economic enterprises. They would prefer to collaborate with these institutions and companies on how to most effectively combat climate change and reduce environmental and social damage from business operations.

While there has been progress, that hasn’t been the case in nearly enough instances. Nevertheless, Ceres has continued to focus on engagement with major financial institutions and corporations, rather than taking a more adversarial stance regarding their performance in outsised roles in the ongoing fight to decrease negative impacts of the climate crisis.

Nearly all major corporations in the US and across the globe have at least made public commitments to adjust their business models and operations to help reduce harmful practices contributing to environmental woes. Most banks, for example, have said they hope to achieve Net Zero greenhouse gas (GHG) emissions and other positive targets to help keep global temperatures from rising too high by designated dates - usually by 2050, with some adding interim milestone targets for measuring progress towards these goals such as the 2030 objectives recommended by Ceres and other environmental advocates.

Smaller firms: next up on the radar for GHG emissions reporting and supply chain transformation

But what about the millions of smaller companies, from quite large still (hundreds or even thousands of employees or more) to smaller, regional or local businesses? These are the ones that are often suppliers, partners, or customers to the major manufacturers, distributors, and shippers in the US and overseas. And with environmental, social, and governance reporting expectations growing for all companies, there will be increasing attention paid to not just what a company or banking institution itself produces in terms of what are categorised Scope 1 emissions (directly related to operations) and Scope 2 (emissions from power sources used), but what that company’s supply chain partners and customers emit in their (Scope 3) business activities as well. And smaller businesses, whether they employ ten or several hundred workers, will need to be ready to reply. Better yet, they’ll ideally be ready for those conversations before the calls (or mandates) come from their large suppliers – or customers or state or national regulators – which could also be the case.

According to our Ceres contacts, there might be a reason for cautious optimism that SMEs are starting to hit the radar of their bank providers on the subject of climate transition planning and preparation. “The super-regionals and regional banks, a lot of their customers are SME-scale companies. And those level banks are the ones who are following suit from the larger banks. They're starting to develop things like transition plans and client engagement strategies, which inherently will be about engaging SME-scale companies (in climate transition discussions and strategy-setting)” responded Saccardi. Also, as he explained, though the strategy and reporting conversations are right now most concentrated at the larger bank, and larger corporate levels, “there has been some triaging (in determining top priority candidates for climate-risk and planning discussions) …starting with the largest companies both because some of them have the most intensive emissions, and also those companies that are most equipped to provide the information and data that the banks need.”

Helpful climate transition assistance emerging for all – and ‘investor voice’ is getting louder 

Saccardi added that Ceres will itself be introducing a new tool in the spring of 2024 to help SMEs prepare for successful climate transitions. “Roadmap 360 is a self-assessment tool specifically targeting SME-scale companies where they can evaluate themselves not just on climate, but really across environmental, social and governance issues in terms of understanding where they are now and what type of expectations that their larger suppliers and investors - once they go down the road of being a public company - what expectations they will have of them, and how they can level up their capabilities. And that's something that we hope will be a valuable resource for this currently somewhat underserved, but important piece of the puzzle.” 

As Program Director for the Ceres company network, Saccardi is optimistic that bankers’ engagement in sustainability exercises and encouragement of customers to adopt renewable/regenerative business models will happen not just at the very top of the commerce chain – but in middle-market and smaller sectors as well. “We hope and expect that the SME-scale companies will start to be engaged from the financial sector. Certainly, from the larger banks, we hope they'll be getting down to that scale, but also from the regional banks - a lot of their core business may come from that (revenue size) customer.” 

No matter what their size, companies must begin shifting their focus to renewable, circular models, say industry watchdogs. From Ceres’s point of view, this is especially important for banks. “Where we are focusing”, says Saccardi, “is working with all the companies (in their network), including the banks to really move out of the goal setting and planning phase to the execution. 

“They know that the out years of the 2020s need to be about actual on-the-ground emissions reduction. That's where we see things like transition plans being so critical, because setting the 2030 goals is great, but unless there's a clear plan to realise them then, you know, the risk is they'll just be another one of these paper goals that aren't met. So, we're really focusing on - certainly with the banks, but also across the sectors we're working with - ‘How do you create the concrete plans that set the blueprint from getting from where they are now to where they've committed to be in 2030’, and ultimately in 2050?”

What’s the overarching, most powerful tool in the arsenal of responsible climate transition and regenerative business advocates? Saccardi says it’s the ‘investor voice’.

“You know, investors in the 2010s and teens were focusing on other aspects of the economy, not the financial sector. What we've seen over the past several years, (they are) realising, as we've been discussing, how critical a role the financial sector plays in enabling the economy (and) that engaging with banks as shareholders is another way to apply pressure. So, in addition to organisations such as ourselves there is certainly an investor voice and there is also the regulatory voice - the SEC and what we're seeing possibly coming out of California and Europe, too. And (to achieve desired climate transition targets) it really will, given the scale of the challenge, it's going to take that ‘surround sound’ of state, federal, international, private sector, investor, civil society, all focusing on this issue.”